The UK government should continue to spend on support for workers and businesses to weather the economic shocks of the pandemic and Brexit, and wait to put the public finances back on an even keel, the head of the IMF said on Thursday.
Concluding a regular review of the UK economy, the IMF acknowledged that the outlook for growth had darkened even in the two weeks since it published its most recent global forecasts.
With Covid-19 infections surging and restrictions tightening across much of the country, it now expects UK output to shrink 10.4 per cent in 2020 and recover only partially in 2021, with growth of 5.7 per cent.
Lower business investment, persistent unemployment and lower productivity growth would hold gross domestic product between 3 per cent and 6 per cent below its pre-pandemic level in the medium term, the IMF said.
“Continued policy support is essential to address the pandemic and to sustain and invigorate a recovery,” Kristalina Georgieva, IMF managing director, said, urging the government to keep job and business support programmes in place until the direct economic effects of the pandemic had faded.
The changes made to bolster the UK’s Job Support Scheme were welcome and there was a case for a similar extension of government-guaranteed lending to small businesses, the IMF said.
The fund also called for “a meaningful additional push” to revive the economy once the pandemic began to subside.
This could mean spending more than currently planned on infrastructure investment, provided projects could be well-targeted and managed. But the UK should also spend more to strengthen its social safety net and help people who lost jobs find new work, given the risk of a persistent rise in unemployment, the IMF said.
While the main message was to embrace fiscal stimulus, the IMF also said the UK had room to loosen monetary policy further — in the near term, by scaling up government bond purchases, with the potential to deploy negative interest rates once policymakers had assessed their likely effect.
However, the fund warned that the UK would need to count the costs of the crisis once the pandemic had subsided and the economy was on the road to a durable recovery.
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In contrast to its advice a decade ago after the financial crisis, the IMF has said that most advanced economies will not need to plan for austerity even once the crisis is over, because borrowing costs look set to remain low.
But Ms Georgieva made it clear that the UK would eventually need to both raise taxes and recalibrate spending, both to repair the public finances and to address rising inequalities. Carbon taxes, with a lead-in time to allow companies and consumers to adjust, and reform of property-related taxes were among the measures the government should look into, she said.
On the spending side, the UK should for equity reasons re-examine the expensive “triple lock” on pensions, the IMF said, but added that there was little room to cut public spending further, given the past decade of austerity. Instead, “some adjustment of both tax bases and major rates appears inevitable”, it said.
In response to the report, chancellor Rishi Sunak said: “Let’s be clear on what the fund are saying today: it’s right to support the economy in the short term . . . but over time, and in line with other major economies, we must get our public finances back on a sustainable path.”
He also asserted that the IMF statement confirmed that the UK was on the right economic course.