By Bob Duncan
The International Monetary Fund (IMF) has issued a stark warning to the Westminster coalition that the UK economy is facing a “substantial contractionary shock” that could prolong the current recession if urgent action is not taken.
In a report published today, the IMF advised that further planned austerity cuts should be delayed unless growth in the economy picks up substantially.
The organisation also claimed that there was as yet no evidence of recovery in the UK economy and that measures to stimulate growth need to be taken by the UK government.
In its annual report on the UK economy, the IMF advised that quantitative easing, further lowering of interest rates and reductions in VAT or Social Security levels should be considered as ways of boosting economic growth.
It also called on the Bank of England’s Monetary Policy Committee (MPC), which sets interest rates and authorises Quantitative Easing, to loosen the purse-strings of the British economy.
Whilst acknowledging that some progress had been made on reducing the UK’s massive debt burden and that it broadly agreed with the actions of the Coalition to date, the IMF said an alternative plan needed to be prepared.
It said the Tory/Lib Dem Coalition should start preparing a Plan B, featuring temporary tax cuts and increased spending on infrastructure, to support the UK economy.
Christine LaGrande, Managing Director of the IMF gave a long list of actions which she believed the UK Chancellor should be taking.
She said: “Unfortunately the economic recovery in the UK has not yet taken hold and uncertainties abound”, adding that “growth is too slow and unemployment – including youth unemployment – is too high. Policies to bolster demand before low growth becomes entrenched are needed.”
Ms LaGrande went on: “We advise more monetary policy measures. And that means the Bank of England taking measures to actually facilitate financing … for the UK to use its balance sheet.
“It [The UK] has never been able to borrow at such a low interest rate – I think it is the lowest ever in the last 800 years – and what it can do in terms of policy is to help British Enterprises to have the benefit of that very, very low interest rate.
“If growth is significantly below forecast, despite those policies, then fiscal easing would be recommended.”
In its official statement on the UK economy, the IMF mission states: “Fiscal easing measures … should focus on temporary tax cuts and greater infrastructure spending.”
Making the case for delayed austerity cuts, it goes on to state, “If growth does not build momentum and is significantly below forecasts even after substantial additional monetary stimulus and further credit easing measures, planned fiscal adjustment would need to be reconsidered.
“To preserve credibility, reconsidering the path of consolidation should be in the context of a multi-year plan focused on further reducing the UK’s large structural fiscal deficit when the economy is stronger and taking into account risks to sovereign borrowing costs.
“Fiscal easing measures in such a scenario should focus on temporary tax cuts and greater infrastructure spending.”
Commenting on IMF calls for the UK Government to deliver a Plan B to boost growth and employment, the SNP renewed calls for the Treasury to deliver capital investment in 30 “shovel ready” projects waiting in Scotland.
SNP Westminster Treasury spokesperson Stewart Hosie MP said:
“The UK Government must listen to the IMF and deliver the Plan B that the Scottish Government has been arguing for to boost growth and employment.
“It seems that everyone except the Chancellor recognises the importance of infrastructure spend as a means to promote economic growth.
“The IMF’s assessment is consistent with the Scottish Government’s calls for £300 million capital investment in 30 ‘shovel ready projects’ to build economic recovery and create jobs across Scotland.
“Every £100m of capital investment is estimated to support 1400 jobs, and would provide a much needed boost to the UKs stagnating economy.
“It’s time for the UK Government to recognise that austerity measures alone aren’t working, signal a new approach by increasing infrastructure spending, and support the Scottish Government’s ‘shovel-ready’ capital projects across Scotland.”
Ed Balls, Labour’s Shadow Chancellor said, “A year ago, the IMF warned that if economic growth undershot expectations, the government should boost the economy with temporary tax cuts and greater infrastructure spending.
“Since then our economy has been pushed into a double-dip recession. How much worse do things have to get before David Cameron and George Osborne finally take action?”
The IMF is forecasting UK growth in 2013 at 2%. This matches the prognosis of the UK’s independent Office for Budget Responsibility (OBR), which was recently revised down from 3% to 2%. Most economists are predicting a much lower growth rate in 2013 of 1.5% to 1.6%.
The Prime Minister, in a speech to business leaders in Manchester, defended the coalition’s austerity measures, saying, “The programme of spending cuts, tax rises and pay freezes was already having the desired effect of reducing the deficit.”, he added, “It’s time to stand firm” and “to resist dangerous voices” calling for “retreat” and “to take the right course [not] the easy one”.
According to the BBC’s political editor, Nick Robinson, “Austerity is a word the Prime Minister doesn’t like to use to describe the coalition’s policies but he is determined to defeat the claim that there is a choice between policies aimed at cutting the deficit and those designed to stimulate economic growth.
“That, of course, is exactly the platform on which France’s new Socialist president was elected.”
The UK has now officially entered a double dip recession after a second successive quarter of negative growth.
Yesterday, official figures showed the Scottish jobs market had experienced its strongest improvement for over a year with both permanent and temporary employment rising markedly, pay rates in both sectors also rose.
In Scotland, labour market conditions were well ahead of the rest of the UK according to the monthly report by the Bank of Scotland.
There are fears that the policies being pursued by the UK Coalition could now seriously undermine Scotland’s economic recovery.