International Monetary Fund notes 'nascent signs of momentum' in its annual health check on the UK economy
The International Monetary Fund has stopped short of calling for George Osborne to temper his deficit-reduction programme, amid "nascent signs of momentum" in the UK's recession-scarred economy.
At the IMF's spring meetings in Washington last month, Osborne faced pointed criticism from the fund's officials over his determination to press ahead with spending cuts despite the flat-lining economy.
But the IMF's experts appear to have softened their view, after spending a fortnight in London talking to officials at the Bank of England and the Treasury – and amid signs of life from the economy, including news that GDP expanded by 0.3% in the first three months of 2013.
In a carefully worded statement published on Wednesday, the IMF said that the £10bn-worth of spending cuts and taxes planned for the coming year would "pose headwinds to growth". Instead of calling for a radical rethink, however, it acknowledged that the Treasury faces a "dilemma".
"Judgments about fiscal policy need to balance debt sustainability with growth concerns," the statement said. "The combination of continuing weak growth and high debt presents a dilemma: further fiscal consolidation will weaken output, with the risk of a permanent loss to productive capacity, while debt will accumulate unless there is consolidation."
It urged the Treasury to "capitalise on the nascent signs of momentum to bolster growth" by enacting pro-growth reforms – such as changes to corporate taxation – within the scope of the coalition's overall spending plans.
The Treasury had pledged to defend its policies robustly in the face of the anticipated onslaught from the IMF, after its chief economist, Olivier Blanchard, said in Washington last month, "there is a point at which you actually have to sit down and say maybe our assumptions were not right and maybe we have to slow down".
Osborne's hand has been strengthened by modest signs of improvement in the economy in recent weeks. "Recent data suggest some improvement in economic and financial conditions," the IMF acknowledged.
However, IMF officials, who were preparing the so-called Article IV report on the UK – its annual health check of member economies – warned that growth would remain weak for the foreseeable future.
"The most likely scenario is a prolonged period in which output is below potential," the IMF said, stressing the risk that the productive capacity of the economy could be damaged by such a long period of stagnation.
The chancellor's controversial Help to Buy scheme, a centrepiece of March's budget, came under fire from the IMF, which echoed warnings from Sir Mervyn King and the Treasury select committee that its main impact might be to push up house prices. The IMF suggested the Treasury might need to impose a tax on unused development land, in order to ensure that more houses are built.
The IMF also called for the government to set out a "clear strategy", for disposing of the bailed-out banks, Royal Bank of Scotland and Lloyds. However, it stressed that "challenges remain", and the process of cleaning up their balance sheets is not yet complete. The statement added that the government might need to step in as a "backstop" for RBS, if the bank needs more capital in order to be attractive to private sector investors.
The team endorsed proposals from the London School of Economics's recent Growth Commission, which called for improvements to training for lower-skilled workers; streamlining of the planning system; and better competition in the banking sector.