U.K. Should Restore Growth, Rebalance Economy

Some signs of an uptick in growth, but still far from strong, sustainable recovery

Financial policies should ensure monetary easing reaches broader economy

Fiscal, structural policies to boost expectations of incomes and investment returns

Despite recent improvements in some indicators of economic growth, the economy is still a long way from a strong and sustainable recovery. The economy also needs to rebalance, the IMF said, and make the transition to a high-investment and more export-oriented economy.

After five years of relatively weak growth, investment is low and youth unemployment is high, and the IMF is concerned about the risk of permanent damage to long-term growth.

“Recent data suggest some improvement in economic and financial conditions, which is encouraging. But the United Kingdom has a long way to go. Investment has been persistently weak and unemployment, especially among young people, is high,” said David Lipton, the IMF’s Deputy Managing Director during a press conference at the conclusion of the IMF’s work in London.

A multipronged approach needed

The complexity of the issues means policymaking has become particularly difficult. Conventional distinctions between demand and supply problems don’t work so neatly—firms might give up on demanding credit lines if they think the terms supplied to them will be particularly onerous, for example.

This makes it all the more important to pursue a package of policies that support each other, the IMF said. Financial policies are needed to restore the health of the banking system, to ensure that monetary policy is fully effective, and fiscal and structural policies are needed to raise expectations of incomes and returns on investment.

The government has shown flexibility in its fiscal program to mitigate damage to growth, but planned fiscal tightening this year will be a drag on the economy, the IMF said.

With unemployment high and interest rates low, the government should take the opportunity to bring forward “high value” spending that has big long-term payoffs. The government could do this within its current fiscal plan, such as

• Bring forward planned capital investment. This would help catalyze private investment.

• Further modify the composition of plans to reduce government debt and deficits. This could include growth friendly measures, such as reducing the marginal effective corporate tax rates to bring investment forward, and introducing tax allowances for raising equity.

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