IMF: UK should slow budget cuts if growth does not return

IMF MD Christine Largarde
Image caption IMF chief Christine Lagarde presented the summary findings in May

The government should slow the pace of budget cuts next year if UK growth does not recover, the International Monetary Fund (IMF) has said.

Its annual report on the UK says that tax rises and spending cuts introduced since spring 2010 have cut growth by a total of 2.5% over the past two years.

The IMF gave a summary of the report in May. Since then, the government has introduced growth measures, such as providing funding for lending.

The IMF praised these moves.

But it added that if growth did not pick up, other measures, such as temporary tax cuts and more means-testing of benefits, should be considered.

The IMF, which is headed by Christine Lagarde, who presented the report's summary findings in May, said: "If growth does not take off and unemployment fails to recede even after substantial further monetary stimulus and strong credit easing measures have been given time to work, the policy response should include a further slowing of fiscal consolidation."

"In particular, fiscal adjustment for 2013-14 would need to be scaled back if growth does not build momentum by early 2013."

It added that further slowing of consolidation was likely to mean the government would renege on its debt target but that this was "unlikely to trigger major market turmoil".

A spokesman for the Treasury said: "The IMF have repeated their advice that Britain's fiscal plans are appropriate, that we are right to support the economy through monetary and credit easing as well as government guarantees for infrastructure."

Shadow chancellor Ed Balls said the report showed the government needed to act: "This is a very serious warning to the Chancellor that urgent action to boost jobs and growth is needed."

'Significant challenges'

The UK is back in recession after the economy shrank by 0.4% in the final quarter of 2011 and by 0.3% in the first three months of this year.

On Monday, the IMF lowered its growth forecasts for the UK to 0.2% in 2012 and 1.4% in 2013. In the spring, it had forecast growth of 0.8% this year and 2% next year.

In its annual report the IMF said that the UK faced "significant challenges" from a stalling recovery, high unemployment and threats from the eurozone.

But it also said that substantial progress had been made towards achieving a more sustainable budgetary position.

Further stimulus?

Earlier this month, the Bank of England's Monetary Policy Committee (MPC) voted to increase its quantitative easing (QE) programme by £50bn, taking the total stimulus to £375bn

Under QE, the Bank buys government bonds, hoping to create beneficial knock-on effects for the economy.

The IMF's report was finished before the Bank's action, which was called "meaningful" by IMF executive Ajai Chopra in a news conference held on Thursday afternoon.

The MPC also discussed the possibility of interest rate cuts, but voted unanimously to keep rates at the record low of 0.5%, where they have stood for more than three years.

The IMF said that in explaining its past decisions not to cut the rate further, the MPC had cited concerns that a cut may reduce activity in money markets.

"However, policy rates of 0.25% or less prevail in the US and Japan and have not produced adverse side effects of a sufficient magnitude to prod a policy reversal," the IMF said.

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