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IMF Urges UK To Consider Tax Cuts

by Robert Lee,, London

03 August 2011

While progress has been made in securing fiscal consolidation targets, low economic growth and high inflation in the UK has led the International Monetary Fund (IMF) to warn that contingency plans, including the possibility of temporary tax cuts, should be considered.

Concluding its latest review of the UK economy, the head of the mission Ajai Chopra said that the IMF expects a gradual, if bumpy and uneven, recovery. According to the Executive Board, progress has been made on the government's medium-term fiscal consolidation plan, and the IMF welcomes this.

However, the latest GDP figures, which show that the economy grew just 0.2% in the last quarter, demonstrate that growth is sluggish, and, with inflation well above target, policy makers face key challenges. Recent increases in indirect taxes and high commodity prices are likely to keep inflation high, and eurozone woes will further complicate matters. On the other hand, inflation is expected to steady out over the next year and a half, roughly reaching the Bank of England's target of 2% by the end of next year.

In addition, Chopra added that, were the UK to hit a period of prolonged weak growth, high unemployment and subdued inflation, the government would need to consider alternative methods to tackle such problems. These could include further quantitative easing by the Bank of England and temporary, unspecified, tax cuts.

Nonetheless, in spite of his warning, Chopra does anticipate that the most likely scenario for the UK will be that of a gradual economic recovery. He did, however, urge the government to remain "nimble" and be prepared to alter its course, should the situation change.

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

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