The UK government should continue to spend on assisting workers and businesses to weather the economic shocks of the pandemic and Brexit and wait for public finances to return to balanced levels, the IMF chief said Thursday.
After regularly reviewing the UK economy, the IMF acknowledged that growth prospects had already darkened in the two weeks since its latest global forecast was published.
With the rise in Covid-19 infections and tightening restrictions in much of the country, UK production is now expected to shrink 10.4 percent in 2020 and only partially recover in 2021 with growth of 5.7 percent .
Lower corporate investment, persistent unemployment and lower productivity growth would keep gross domestic product between 3 and 6 percent below pre-pandemic levels in the medium term, the IMF said.
"Continued political support is essential to fight the pandemic and maintain and revitalize a recovery," said Kristalina Georgieva, executive director of the IMF, calling on the government to maintain job and business support programs until direct economic ones The effects of the pandemic have subsided.
The changes to strengthen the UK's job support program were welcomed, and there were reasons for a similar expansion of government-guaranteed lending to small businesses, the IMF said.
The fund also called for a "significant extra boost" to revive the economy once the pandemic subsides.
This could mean spending more than currently planned on infrastructure investments, provided the projects can be targeted and managed. But the UK should also spend more to strengthen its social safety net and help people who have lost their jobs find new work, amid the risk of continued spikes in unemployment, the IMF said.
While the main message was to take advantage of fiscal stimulus, the IMF also said the UK had room for further monetary easing – in the short term by expanding government bond purchases with the potential to use negative interest rates once policymakers assess their likelihood would have caused.
However, the Fund warned that once the pandemic has subsided and the economy is well on its way to a permanent recovery, the UK will need to count the cost of the crisis.
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Contrary to its advice a decade ago after the financial crisis, the IMF has stated that most advanced economies will not need to budget for austerity after the crisis has ended, as borrowing costs are expected to remain low.
Ms Georgieva made it clear, however, that the UK will ultimately need to both raise taxes and recalibrate spending in order to both repair public finances and address growing inequalities. Carbon taxes with a lead time to allow businesses and consumers to adapt, and reform of property-related taxes are among the measures the government should consider, she said.
On the expenditure side, in order to be fair, the UK should reconsider the expensive “triple lock” on pensions, the IMF said, but added that given the austerity measures of the past decade, there was little room for further cuts in public spending. Instead, "some adjustment to both tax bases and main rates seems inevitable," it said.
In response to the report, Chancellor Rishi Sunak said: "Let us be clear what the Fund is saying today: it is right to support the economy in the short term … but over time, and in line with other major economies, we must make our public Put finances back on a sustainable path. "
He also claimed that the IMF statement confirmed that Britain was on the right economic course.