IMF raises growth prospects for Britain, but warns of ‘difficult choices’

Tuesday May 21, 2024 11:15 am

The IMF now expects Britain to grow by 0.7 percent in 2024, up from the April estimate of 0.5 percent. Growth will pick up again next year to 1.5 percent as “disinflation boosts real incomes and financial conditions ease.”

The International Monetary Fund (IMF) has upgraded its forecasts for UK growth this year, but warned the government will face “difficult choices” to stabilize public debt.

“With growth recovering faster than expected, the UK economy is approaching a soft landing after a mild technical recession in 2023,” the Washington-based body said in its latest assessment of the UK economy.

It now expects Britain to grow by 0.7 percent in 2024, up from its April estimate of 0.5 percent. Growth will pick up again next year to 1.5 percent as “disinflation boosts real incomes and financial conditions ease.”

The new forecasts come after the economy grew 0.6 percent in the first quarter of the year, faster than predicted by many economists and independent forecasters.

However, the IMF noted that Britain faces a number of structural challenges that will limit potential growth in the longer term, including an aging population and slow productivity growth.

It urged the government to undertake major structural reforms to boost the potential growth rate. “Ambitious, structural reforms to boost economic potential and living standards are urgently needed, with a focus on easing planning restrictions, addressing skills shortages and improving health outcomes,” the report said.

These structural reforms must be supported by an independent growth commission, the IMF said.

Without major structural reforms, the IMF warned that the UK’s fiscal position is “likely to involve some difficult choices”.

It stressed that the government’s post-election spending plans, which assume real growth of one percent and frozen capital expenditure, “do not appear to take sufficient account of the known pressures on public services”.

“Difficult choices will have to be made in the medium term to stabilize public debt, given the significant pressure on public services and crucial investment needs”

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Measures recommended by the IMF included higher carbon taxes, broadening the inheritance tax base and capital gains tax reforms. The productivity of public services can also be improved through the use of AI.

However, it recommended against tax cuts. “As a general principle, the staff would recommend against additional tax cuts unless they credibly promote growth and are appropriately offset by high-quality deficit-reducing measures,” the IMF said.

Jeremy Hunt’s cuts to national insurance were criticized for their ‘significant costs’, but the IMF acknowledged the ‘potential benefits for labor supply’ and noted that the costs were partly offset by other measures such as reforms to the -stupid-regime. .

On monetary policy, the IMF warned that the Bank of England could “slow or even reverse the recovery” by leaving interest rates unchanged for too long. It recommended cutting rates by around 50-75 basis points, noting that its meeting-by-meeting policy approach was broadly “appropriate.”

Chancellor Jeremy Hunt said: “Today’s report clearly shows that independent international economists agree that the UK economy has turned around and is on course for a soft landing.

“The IMF has upgraded our growth for this year and forecast that we will grow faster than any other major European country over the next six years – so it is time to shake off some of the unwarranted pessimism about our prospects” , he continued.

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