Risks in UK economy remain, warns IMF

22 May 2012 | By Henry Brennan

In its latest review of the UK economy, the IMF recommends further monetary easing, temporary tax cuts and greater infrastructure spending as effective means of boosting growth in the UK.

The stability of the UK’s financial sector needs greater focus, particularly as the IMF warns the “too big to fail” issues must be addressed based on the real possibility of contagion.

Purchasing private-sector bonds and providing longer-term bank funding facilities against a broad range of collateral (with haircuts) are both potential options which could help address the risk of contagion shocks, according to the IMF.

While austerity is highlighted as ’essential’ by the IMF, measures to promote growth are encouraged through tax reforms and Keynesian measures such as infrastructure investment.

“Fiscal space for further growth-enhancing measures could be generated by property tax reform, restraint of public employee compensation growth, and better targeting of transfers to those in need,” it writes. “This fiscal space could be used to fund higher infrastructure spending, which has a high multiplier and raises potential output. It will also be important to shield the poorest from the impact of consolidation.”

The IMF accepts further monetary easing could fuel inflationary pressures but the potential benefit of closing the UK’s output gap presents a greater priority.

The Monetary Policy Committee should be encouraged to reassess its position on the policy rate and consider taking it lower than the current rate of 0.5%, it adds.

Chancellor George Osborne welcomed support for the government’s deficit reduction plan, adding that the IMF must prepare if its members in Europe do not stand behind the euro.

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