UK Economy ‘On A Steady Course’ Says IMF
In its annual report on the UK, the International Monetary Fund (IMF) says that the UK economy has fared better than most in the current global slowdown as a result of a “prudent and predictable fiscal policy”. Unemployment is now at its lowest level for 25 years and Gordon Brown’s recent pre-budget report (PBR) is said to have “set an international standard of best practice”.
- Current nine year expansion marks the longest period of sustained noninflationary growth of the U.K. economy in more than 30 years.
- Performance owes much to the government’s strong policy framework with its emphasis on clarity of objectives, transparency, and accountability
- Important structural reforms are underway, enhancing the prospects for continued strong performance over the medium term.
- Challenges and risks remain – the weaker external demand environment and the persistent strength of sterling are hampering the manufacturing sector.
- Other developments (high level of private debt, prolonged rise in house prices), while possibly structural, might also be symptomatic of underlying imbalances.
- Recent PBR projects GDP growth at 2-2½ percent in 2002, only slightly above IMF central forecast
- Cyclically-adjusted overall deficits of about 1% of GDP over the medium term would not compromise the strong underlying fiscal position achieved in the late 1990s, as highlighted by the projected stability of the public debt ratio at the modest level of 31% of GDP
- Primary spending is projected to rise by a cumulative 16% in real terms in the current and subsequent two fiscal years. A faster pace, or a continuation of expenditure growth well above GDP growth in the following years, may be difficult to implement without incurring significant waste.
- In order to raise funds for additional spending it would be preferable to focus on measures that broaden the tax base, rather than increase tax rates (or introduce new taxes), in order to safeguard-and indeed improve-the relative neutrality of the tax system. A broader scope for user fees would promote the efficient use of resources in the economy. In both cases, targeted transfers could offset any resulting decline in the purchasing power of the poor.
- Public understanding of fiscal developments might be increased further by the publication of quarterly Treasury reports explaining developments in revenue and expenditure, including in relation to budget projections.
- The UK’s cyclical position is currently not nearly as weak as those of the United States and the euro area. Moreover, while labour market indicators have weakened, unit labour costs have picked up, and house prices and credit to households remain on the rise.
- Whether the U.K. should join EMU obviously remains a critical issue from both a macroeconomic and a structural standpoint. The government’s policy of continuing to prepare for entry, should a decision to join be made at a future date, remains appropriate.
In summation, the IMF reports that whilst significant risks remain, the UK economy will remain on a ‘steady’ course thanks to the policy framework put in place by the government.
The report concludes that “monetary policy, firmly anchored to the symmetric inflation target, should remain the preferred tool for responding to changes in short-term prospects. Fiscal policy should remain oriented towards prudent medium-term objectives, while allowing the automatic stabilisers to operate. Equally important, the government’s structural reform agenda should continue to be pursued vigorously. The track record of sound policy design and implementation in recent years bodes well for continued success in a more uncertain world economy.”