Repairing U.K. Economy Will Take Time, Says IMF

Significant fiscal tightening to ensure confidence in long-term debt sustainability

Growth of 2 percent expected in 2011, led by private sector

Uncertain growth forecast suggests policies should stay flexible

In its annual health check of the economy, the IMF says it is expecting growth of 1¾ percent in 2010, followed by 2 percent in 2011.

“There’s considerable uncertainty around this forecast, which makes it very important for policymakers to be vigilant and flexible,” IMF mission chief Ajai Chopra said. “Encouragingly, unemployment has stabilized, but it’s still too high. This crisis won’t be over until we start seeing significant falls in unemployment, and that’s going to make it very important to lay the foundations for sustainable, strong, and equitable growth.”

Very low real interest rates, the fall in sterling, and the global recovery could provide a bigger boost to growth. But further rapid debt reduction by households and companies, a sharp new downturn in the housing market, or greater than expected weakness in the euro area are all factors that could undermine the recovery now underway, according to the report.

Every year, the IMF conducts reviews of its member countries’ economies. The analysis is subsequently discussed by the IMF’s 24-member Executive Board.

Rebuilding confidence

The U.K. fiscal deficit was 11 percent in 2009, a post-war record and one of the highest deficits in the world. As a result, debt is rising rapidly. After assuming office in May 2010, the Conservative-Liberal Democrat government has moved swiftly to announce a number of important policy initiatives to promote confidence and sustainable growth.

The cornerstone of the government’s policies is an ambitious plan to achieve a balanced cyclically-adjusted current budget by 2014/15 through a combination of spending cuts to reduce total government expenditure by more than 7 percentage points of GDP over the next six years and tax increases that include a bank levy and higher value-added and capital gains taxes. Many of these measures will be implemented during the government’s first year in office.

“The government has announced tough measures to ensure fiscal sustainability and also reduce the risk of a possible costly loss of confidence in public finances. Inevitably, the consolidation will slow short-term growth, but this is outweighed by the longer-term benefits,” Chopra said.

“Although consolidation is necessary, it’s important that it be...