The new government has made an excellent start.” That is the opening remark of the International Monetary Fund after its annual Mission to review Britain’s economy. They say:
“The new government has made an excellent start. It has set a high standard for its economic policies, aiming to maintain stability and foster long term growth while seeking fairness and developing human potential. And it has taken decisive steps toward these goals by making the Bank of England independent, introducing a budget that makes rapid strides toward sound public finances, and initiating Welfare-to-Work and other programmes to enhance employability.
The Chancellor Gordon Brown, welcoming the conclusions of the IMF’s Mission, said:
“This is a ringing endorsement of the Government’s economic policies from the world’s most respected international monetary body
The IMF continued:
“These [economic] policies are timely, as the environment is becoming challenging. …. With output now close to potential and the associated risks of rekindling inflation, the economy faces a period of increased uncertainty.
“Encouragingly, the fiscal and monetary policies now in place should alleviate these tensions significantly. In particular, we judge the July budget to be more to the point in this regard than sometimes supposed. ….it is difficult to criticize the magnitude of the overall up-front fiscal correction. Firm implementation, particularly through observance of the control totals for spending this year and next, should boost credibility, slow the upswing, and set the public finances on a sound medium-term track.
“The recent series of monetary tightening moves was overdue and, despite the help from the budget, the current situation will keep policy makers on their toes. ….All in all, with the economy possibly moving well beyond potential further action will likely be required, although with substantial fiscal and monetary tightening in the pipeline interest rates may not need to rise as far as markets expect.
“Turning to medium term issues, the government’s objectives of promoting stability and encouraging investment in physical and human capital in the context of a fair society are the common thread of a broad range of initiatives.
“The government’s positive approach to European issues is welcome: the United Kingdom’s perspectives can provide constructive input in EU discussions. Likewise, the recent opening of a thorough national debate on economic aspects of EMU was overdue.
Notes for Editors
1. As part of its normal surveillance work, the IMF makes a regular yearly assessment of the UK economy along with other Member States. The full text of the IMF’s Concluding Statement following its United Kingdom – 1997 Article IV Consultation is below.
2. IMF surveillance of every member economy is carried out primarily through annual discussions between Fund staff and member governments and central banks, called Article IV consultations. The resulting reports are discussed at the IMF’s Executive Board. The Board also conducts multilateral surveillance through regular discussions of developments in the world economy and key exchange rates. A report on the world economy is published twice a year. (“World Economic Outlook”, IMF, April 1997 is the latest).
United Kingdom 1997 Article IV Consultation Concluding Statement of the Mission
1. The new government has made an excellent start. It has set a high standard for its economic policies, aiming to maintain stability and foster long-term growth while seeking fairness and developing human potential. And it has taken decisive steps toward these goals by making the Bank of England independent, introducing a budget that makes rapid strides toward sound public finances, and initiating Welfare-to-Work and other programs to enhance employability.
2. These policies are timely, as the environment is becoming challenging. Behind the impressive macroeconomic performance strong growth, declining unemployment, and low inflation there now loom imbalances rooted in powerful divergent forces: surging domestic demand, which may accelerate further as “windfalls” boost consumption; and the incipient weakness of the tradable goods sector resulting from the strength of sterling. With output now close to potential and the associated risks of rekindling inflation, the economy faces a period of increased uncertainty.
3. Encouragingly, the fiscal and monetary policies now in place should alleviate these tensions significantly. In particular, we judge the July budget to be more to the point in this regard than sometimes supposed. The fiscal position (as measured by the economically more meaningful financial deficit) is set to improve this year by a full 2 1/2 percent of GDP, of which we expect the immediate policy-induced impact on demand to be about half. While the budget measures could have been tilted more heavily against current consumer spending (particularly in view of earlier cuts in income tax), it is difficult to criticize the magnitude of the overall up-front fiscal correction. Firm implementation, particularly through observance of the control totals for spending this year and next, should boost credibility, slow the upswing, and set the public finances on a sound medium-term track.
4. The recent series of monetary tightening moves was overdue and, despite the help from the budget, the current situation will keep policy makers on their toes. Looking forward, the strength of sterling complicates the task: as it appears unsustainable and, according to market expectations, temporary the extent to which it will help slow the economy is uncertain. All in all, with the economy possibly moving well beyond potential further action will likely be required, although with substantial fiscal and monetary tightening in the pipeline interest rates may not need to rise as far as markets expect.
5. The new monetary policy framework appropriately makes the Bank of England fully accountable for achieving the inflation target and maintains transparency. However, accountability should not detract from due emphasis on the inherently forward-looking nature of inflation targeting. It would be helpful in this context for the framework to reincorporate explicitly the two year policy horizon. This would recognize the lags with which policies take effect and reflect prevailing practice.
6. Turning to medium-term issues, the government’s objectives of promoting stability and encouraging investment in physical and human capital in the context of a fair society are the common thread of a broad range of initiatives. As the government fleshes out its policies, there will be a need for careful coordination to ensure that policy interactions are taken fully into account. In particular:
- We welcome the emphasis on labor market flexibility (both at home and abroad) and the associated initiatives to increase employability while reforming taxes and benefits so as to strengthen work incentives. The Welfare-to-Work program seeks to address structural unemployment head on, but skillful implementation will be required if its ambitious objectives are to be realized. We are more doubtful about the national minimum wage a blunt instrument for achieving a fairer income distribution and a two-edged sword for rewarding work if set too high. At a minimum, as the experience of other countries shows, lower rates should be specified for youths to alleviate adverse employment effects.
- Higher investment will require higher national savings, in which public saving plays a key role. While the golden rule is a step in this direction, it only addresses the financing of public investment. It would be desirable in our view for the government to aim for a more ambitious objective–balance over the cycle– that would release additional resources for private investment. Indeed, the government’s projections for the public finances show balance being achieved in the medium term. The government can also contribute by shifting its own spending priorities toward investment decisions on which will be improved by the move to resource accounting.
- Boosting national savings also calls for action on the tax system. The measures taken with regard to advance corporation tax credits, and the intention to review areas such as corporate and capital gains taxes, pensions, and savings accounts are welcome. An integrated approach is important to ensure that overall distortions are reduced and incentives for aggregate saving are enhanced. Savings could also be fostered by broadening the taxation of consumption. In this regard, while we are aware that successive governments have foresworn significant broadening of the VAT base, this is an issue that warrants serious economic debate, all the more so given the hard choices that lie ahead in reconciling spending priorities.
- This reconciliation will be facilitated by the Comprehensive Spending Reviews, and the envisaged high level coordination should ensure their effectiveness. The government’s willingness to consider radical approaches in areas such as social security will be important to ensure consistency between overall fiscal objectives and commitments to raise spending in priority areas such as health and education.
- Plans to integrate financial oversight promise to focus accountability and thereby strengthen supervision. Their design needs to ensure that the Bank of England can continue to fulfill its financial and monetary stability mandates after it sheds its front-line supervisory role.
7. The government’s positive approach to European issues is welcome: the United Kingdom’s perspectives can provide constructive input in EU discussions. Likewise, the recent opening of a thorough national debate on economic aspects of EMU was overdue.
8. The government’s pledge to start to reverse the decline in the United Kingdom’s aid spending and its support for the goal of reducing world poverty are welcome. Consistent with this goal, the United Kingdom is urged, together with other major countries, to administer policies on military sales to developing and transition countries in a way that avoids encouraging unproductive expenditures and heightening security tensions.
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