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IMF Tells The UK Not To Use Unexpected Surplus For Public Spending

Jason Gorringe, Tax-news.com, London

23 November 2000

In its autumn economic forecasts published yesterday the European Commission predicted that the UK goverment's surplus in 2000-01 would be more than £40bn or 4.5% of gross domestic product, including £22.5bn from the sale of third-generation mobile frequencies. Without that windfall, the surplus will still amount to 2.1% of GDP, almost double Gordon Brown's forecast of 1.1% of GDP, but in line with City estimates.

Yet on the same day the IMF warned that there is no scope for further increases in spending, saying that extra public spending not matched by a slowdown in private spending could lead to higher inflation and higher interest rates. In fact, the minutes of this month's Bank of England monetary policy committee meeting, also released yesterday, showed a unanimous decision to keep rates on hold at 6%, encouraging the City to believe that the next move will be downwards.

However the IMF said the Bank had to be ready to move in either direction, adding that the unexpected extra surplus should be used to pay for increased public investment and for tax cuts. 'We recognise that, after several years of fiscal tightening, increases in public spending are needed in some areas, particularly infrastructure and health care,' said the report, 'Nevertheless, there may be more scope for moderating the increase in current expenditure in other, less critical areas.'

The chancellor said last night that he would heed the IMF, telling the House of Commons Treasury Select Committee: 'There will be no spending spree We have no intention of doing anything other than meeting our fiscal rules.'

The Chancellor made it clear that he intended to follow the advice contained in the IMF's regular report on the UK economy, which said it would be 'prudent' for the government to refrain from announcing any additional expenditure in what will probably by the last Budget before the next election. 'We have no intention of doing anything other than being prudent and cautious with the public finances in the coming months,' said Gordon Brown.

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