Britain requires further monetary easing to aid the economy and Chancellor of the Exchequer George Osborne should prepare for temporary tax cuts, the International Monetary Fund said.
With the economy mired in its first double-dip recession since the 1970s, the Bank of England and the Treasury should introduce policies to underpin demand and unclog the financial system, the Washington-based lender said in its annual review of the U.K. published today. The central bank needs to inject further stimulus through bond purchases or by cutting interest rates, with tax cuts following as soon as the fall.
“If the economy turns out to be significantly weaker than forecast fiscal easing should be considered,” IMF Managing Director Christine Lagarde said at a press conference in the Treasury in London.
The call for action was accompanied with praise for existing deficit-cutting plans, which the IMF said had gained the credibility of investors and lowered government borrowing costs. Should monetary tools fail, Osborne should look at temporary cuts in sales and payroll taxes and more spending on infrastructure, it said.
‘Fourth in Line’
Changing tack in the face of a deteriorating economy would outweigh any loss of credibility with financial markets so long as the government has a longer-term plan to restore fiscal health, the IMF said. The fiscal lever should be “fourth in line” among the measures recommended for the U.K., Lagarde said.
The opposition Labour Party seized on the comments, saying Osborne’s plan to erase the bulk of a deficit of 8 percent of gross domestic product by 2017 is damaging the economy.
“Even they are facing up to the reality that it’s not working,” Ed Balls, who shadows Osborne in Parliament, said of the IMF. “We need a plan for jobs and growth. The IMF agree with that.”
Britain faces “large” risks as the crisis in the euro area, its biggest export market, threatens to derail growth and inflationary pressures remain weak, the IMF said.
“There are more tools that can be used from a monetary policy point of view and we have discussed that extensively with the Bank of England,” Lagarde said. “We believe that it has quantitative-easing measures available that could be resumed. We also believe that there is room in terms of interest rates that could be used as well.”
Options for boosting lending to households and businesses include the central bank, under instruction from the Treasury and using the government balance sheet, buying mortgage-backed covered bonds and restarting liquidity programs for banks, the IMF said.
Lagarde spoke less than an hour after a report showed U.K. inflation slowed more than economists forecast in April to 3 percent, relieving Bank of England Governor Mervyn King of the need to write to Osborne to explain why it’s above the government’s limit. It’s the first time inflation has been within the boundaries set by the government since February 2010.
The pound fell for the first time in three days against the dollar after the IMF report and the inflation data. Sterling declined 0.3 percent to $1.5796 at 2:50 p.m. London time. U.K. government bonds dropped for a second day, lifting the 10-year yield 2 basis points to 1.859 percent.
Britain had an underlying budget deficit of 13.8 billion pounds ($21.8 billion) in April, the first month of the fiscal year as the slowdown subdued tax receipts. The figure, which excludes support for banks, compared with 9.1 billion pounds a year earlier, the Office for National Statistics said today.
Osborne should consider borrowing more money to spend on infrastructure, the IMF said. It also suggested options to lower private-sector borrowing costs, including the purchase of private-sector bonds through the central bank and the provision of longer-term bank funding facilities against a broad range of collateral.
Britain’s economy has been “flat” and productive capacity could remain idle for an extended period, the fund said.
The IMF assessment contrasted with a separate review today by the Paris-based Organization for Economic Cooperation and Development, which said Osborne was right to push ahead with his budget cuts and that the central bank stimulus program is “appropriately providing strong support to the economy.”
Osborne told the press conference that the government is planning for all euro-area contingencies.
“It’s clear we’re now reaching a critical point for the euro zone,” he said. Euro-area members “need to stand behind their currency or face up to the prospect of a Greek exit.”
“The IMF must also prepare for the consequences if members in Europe do not follow its advice,” he added.
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