22 May 2013

IMF tells chancellor to boost growth

The International Monetary Fund (IMF) has backed away from its ringing endorsement of UK economic policy.

In the past two years, the end of its annual Article IV consultation with Britain has been brandished by George Osborne as vindication of his deficit reduction plan, despite disappointing growth.

Today, the IMF mission concluded its visit to Britain with a statement acknowledging “recent data suggest some improvement in economic and financial conditions [but] …the prospects remain for weak growth”. However the Treasury will be relieved that the fund has not yet directly spelt out an alternative fiscal path for coalition policy.

The IMF does say that financial and fiscal policy could be used to give “greater traction” to the recovery, whilst adhering to the deficit plans in the medium-term.

“The planned fiscal tightening will be a drag on growth. Discretionary measures for this fiscal year amount to £10bn. These will pose headwinds to growth,” says the concluding statement. It warns that part of the dilemma for Britain is that “further fiscal consolidation will weaken output, with the risk of a permanent loss to productive capacity”. It suggests more government measures to boost the economy. “In the current context in which labour is under-utilised and funding costs are cheap, the net returns from such measures are likely to be particularly favourable”.

The statement does provide strong backing for the “welcome flexibility” shown by the chancellor in slowing down fiscal consolidation in the face of a weak economy. Mr Osborne chose to miss a self-imposed debt target last December, and has twice extended the time-frame for meeting this target.

The IMF also suggests that the government may provide a backstop for a “capital shortfall” at partly state-owned RBS and Lloyds Banking Group. It pointed to a risk of the “Help to Buy” the new Treasury housing subsidy scheme: if housebuilding failed to increase, “the result would ultimately be mostly house price increases that would work against the aim of boosting access to housing”.

A full Article IV report will be published before July.

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UPDATE (15:00)

I have just interviewed David Lipton, the deputy managing director of the IMF. His interview clarified and hardened the position articulated. It’s pretty clear that the IMF feels George Osborne should change UK fiscal policy, among other policies, to boost a weak recovery. There is no “silver bullet”, though, he told me:

“Looking at this, it seems clear the country needs infrastructure, and since it needs it eventually, this seems the right time to be intensifying the infrastructure effort. Doing it now when the impact would be very substantial seems like a wise course of action.

“Yes this is fiscal policy – it would require the government to advance some of its current spending plans. To us (it) seems like a strategy that would help the economy and not damage fiscal sustainability because of its contribution to growth. In the long run it would leave the fiscal situation better.”

I asked him if this was a “Plan B”.

“No, I don’t think it’s a Plan B. What we see is the need always to take into account the impact of policies and their results and making corrections along the way.”

But when I asked him if the UK should borrow a little more now in order to borrow less in future, he said: “I think the point is that having a slightly different path of adjustment, we think, would strengthen the economy because some of the spending would be high impact”.

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