Lessons from U.K. policy frameworks

• Pages: 81-87

Page 81

Over the past decade, average per capita growth in the United Kingdom has been more robust and less variable than in any other Group of Seven country. Many factors have been at play, but clearly the country's strong and transparent frameworks for monetary and fiscal policy and sound implementation have made an important contribution. There may be lessons here for other countries, say the IMF's Susan Schadler and James Morsink.

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U K. policy frameworks prove their mettle

Rising energy prices and sharply decelerating house prices combined to create a challenging environment for U.K. policymakers in 2005. But the economy, which has recorded strong, steady growth in recent years, is proving resilient. In effect, the stresses of the past year have amounted to the toughest test yet for the country's widely respected monetary and fiscal policy frameworks, say Susan Schadler, Deputy Director of the IMF's European Department, and James Morsink, Division Chief for the United Kingdom. They discuss with the IMF Survey why these frameworks may also provide worthwhile examples for other countries facing similar challenges.

IMF Survey: The IMF has praised the U.K.'s framework for monetary and fiscal policy. Are there lessons for other countries?

Schadler: Other countries can learn much from the United Kingdom's strong, clear, and transparent policy frameworks, which have made important contributions to its robust and steady performance over the past decade. Particularly in the face of the increase in energy prices and deceleration in house prices in the past year, these frameworks have really proved their mettle.

Monetary policy is formulated in an inflation-targeting framework. The independent Monetary Policy Committee, comprising experts from outside and inside the Bank of England, makes decisions on interest rates with the objective of keeping inflation at the 2 percent target. This framework has produced decisions that seem well considered and consistently appropriate.

The fiscal framework has three pillars: clear fiscal rules- the golden rule over the cycle (requiring the current budget to be in balance or surplus, on average, over a business cycle) and a limit of 40 percent of GDP on net debt of the public sector-that guide decisions about budgets with a mediumterm focus while allowing for policy to be countercyclical; transparency requirements; and a medium-term budgeting...