United Kingdom – 2009 Article IV Mission Concluding Statement

by Mike Godfrey, Tax-News.com, Washington

02 June 2009

The IMF staff has issued an Article IV mission concluding statement with regard to the UK economy, warning that the UK remains susceptible to potential shocks. The sharp increase in public sector borrowing and contingent government liabilities, together with continued financial sector fragility, are significant vulnerabilities in the view of the IMF.

They urge that credible and consistent policies are needed to alleviate risks and strengthen market confidence. In addition to addressing the financial sector instability and faltering credit supply, the IMF believes that there needs to be a firm commitment to the existing policy objectives of price stability and fiscal sustainability.

Output is likely to continue to contract in the near term, although at a decelerating pace. The IMF’s April 2009 World Economic Outlook projected UK GDP to decline by 4.1% this year, with quarterly growth picking up gradually through 2010. In this central scenario, the economic recovery is expected to be subdued and gradual as banks and households go through a difficult balance sheet restructuring process.

Inflation is expected to fall and stay below the 2% target for an extended period. The IMF endorsed the Bank of England’s strategy of aggressive monetary easing including 'quantitative easing'. Initial results have been moderately encouraging: bond rates have come down and liquidity in some markets has improved. It is reassuring to the IMF that the Monetary Policy Committee (MPC) can act independently of the Treasury to unwind asset purchases in the future. This puts the MPC in a strong position to determine and implement an exit from quantitative easing concentrating on the inflation target. Transparent communication by the MPC on these aspects of quantitative easing will bolster market confidence, predicts the IMF.

The deteriorating fiscal position and its structural nature were acknowledged commendably in the 2009 Budget, notes the statement. Tax revenues are unlikely to recover entirely with the economic upturn, because of additional sensitivity to asset prices and the level of financial sector activity; public debt is projected to double in five years, although to a level still in line with other major economies; contingent liabilities due to the cost of financial sector interventions were estimated and provided for in the authorities’ fiscal calculations. Against this background, the measured temporary fiscal stimulus implemented in the 2008 Pre-Budget Report and the 2009 Budget, together with the operation of automatic stabilizers, is appropriate, according to the IMF statement.

A continued strong commitment to medium-term fiscal consolidation is vital to maintaining trust in the sustainability of the fiscal position opines the IMF. The Pre-Budget Report and the 2009 Budget already announced consolidation plans through 2013/14, taking account of risks to the outlook. However, the IMF would like to see public debt put on a more firmly downward path faster than envisaged in the 2009 Budget. Greater clarity is also needed on the specific measures needed to bring expenditure towards convergence with revenue, but the current emphasis on expenditure reduction is appropriate, believes the IMF. In addition, the IMF points out that structural reforms to address rising costs related to demographic change would add to the credibility of fiscal sustainability.

The IMF would like to see deficits more aggressively reduced as and when any positive economic developments materialize. Finally, the IMF stated that it is desirable to develop a broad public consensus on the critical need for sizeable fiscal adjustment when the circumstances permit.

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