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IMF Supports UK's Fiscal Sustainability Plans

by Ulrika Lomas,, Brussels

01 October 2010

The UK government's deficit reduction plan has been endorsed by the International Monetary Fund, which has described proposed measures to balance the budget by 2015/16 as "strong" and "appropriately ambitious."

"The consolidation plan and implementation of early measures to tackle the deficit — one of the highest in the world in 2010 — greatly reduces the risk of a costly loss of confidence in fiscal sustainability and will help rebalance the economy," the IMF said in its 2010 review of the UK economy. "These benefits outweigh the expected costs in terms of adverse effects on near-term growth."

Nonetheless, the IMF highlighted the potential dangers of "growth headwinds" stemming from such a substantial fiscal adjustment and recommended that the government employ "the free operation of automatic stabilizers in both directions" as a safeguard against this.

The Fund also suggested that bringing forward plans to increase the statutory retirement age, and aligning the "generosity" of public sector pensions with their private sector counterparts could also help to cement long-term fiscal sustainability.

The establishment of a new independent Office of Budget Responsibility (OBR) was also welcomed by the IMF. "The OBR complements the government’s commitment to fiscal discipline by enhancing the transparency and credibility of the budget process and helping inform policy decisions," the report noted. However, the fund stressed the importance of the OBR maintaining an "arms length relationship" with the Treasury to underpin its independence.

The coalition government intends to bring down the budget deficit, currently about 11% of gross domestic product, through a fiscal consolidation plan that is weighted 80% towards spending cuts and 20% towards tax increases. Details of the spending cuts are to be announced in the Comprehensive Spending Review, due on October 20. It is expected that this will contain savage cuts in departmental spending by up to 25%.

While British taxpayers are bracing themselves for a few years of fiscal austerity, the government will no doubt be relieved to learn of the IMF's conclusions, coming as they do after the UK maintained its top credit rating, and with it, the confidence of the world's financial markets.

TAGS: economics | pensions | fiscal policy | gross domestic product (GDP) | budget | International Monetary Fund (IMF) | United Kingdom

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