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IMF Calls For More Neutral UK Tax System

by Robert Lee,, London

15 December 2015

The International Monetary Fund (IMF) has recommended that the UK make its tax system more neutral, by scaling back distortionary expenditures, reforming property tax, and reducing the tax code's bias towards debt.

The recommendations are included in the IMF's latest Article IV consultation. In its concluding statement, the IMF said that introducing greater neutrality in the UK tax system could help promote efficiency and stability.

It suggested that reforming tax expenditures (such as nonstandard zero value-added tax rates) could free up resources for other uses, including higher spending on infrastructure. It also argued that property tax reform could help reduce vulnerabilities in the housing market by easing supply constraints. The IMF pointed out that rebalancing taxation away from transactions and toward property values could boost mobility and facilitate more efficient use of the housing stock. In addition, reducing council tax discounts for single-occupant properties could increase the use of these properties.

Finally, the IMF recommended that the Government explore adopting an Allowance for Corporate Equity to promote financial stability.

The IMF observed that the UK's recent economic performance has been strong and that considerable progress has been made in addressing underlying vulnerabilities. It said that steady growth looks likely to continue over the immediate term and that the economy looks to be running at near capacity. Growth should slow slightly in 2016 and average in at around 2.25 percent over the medium term. Risks to this "broadly positive outlook" include volatility in the housing market, the current account and fiscal deficits, and uncertainty over the outcome of the forthcoming European Union independence referendum, the IMF concluded.

UK Chancellor George Osborne commented: "This is the strongest IMF assessment of the British economy in the five years I've been doing this job. Yes, there are still risks – the IMF have identified the risks, and they are the same risks we've identified and are taking action to prevent. I take this as an endorsement of our plan to fix the roof while the sun is shining."

TAGS: tax | business | value added tax (VAT) | property tax | tax incentives | International Monetary Fund (IMF) | United Kingdom | tax rates | tax breaks | tax reform

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