THE UK needs to cut business taxes, slash red tape to allow more house building and bring forward infrastructure spending to make sure the recovery takes hold, the International Monetary Fund (IMF) told George Osborne yesterday.
The analysts want the government to counteract the £10bn of fiscal tightening this year with more infrastructure spending, as long as the overall spending plan remains unchanged over the medium term.
“Bringing forward planned capital investment where possible would help catalyse private investment and spur much-needed growth,” the IMF said, arguing schemes like social housing improvements and school repairs could start immediately.
Barriers to construction must be removed otherwise the IMF fears the Help to Buy scheme will simply boost house prices, pushing ownership out of the reach of those the scheme wants to help.
And corporate taxes should be cut to incentives more private sector spending, it said. But Osborne argued he had already made many of these changes.
“It is a hard road to recovery, but we are making progress. The news this week that inflation has fallen and borrowing continues to fall are the latest evidence of that,” Osborne said. “I agree with the IMF that the best approach is a multi-pronged approach – our strategy is just that: monetary activism, a credible fiscal plan and structural reform.”
However it is not thought he will bring forward more infrastructure spending into this year.
“Rather than burying his head in the sand our chancellor should listen to the IMF and act to deliver the strong and sustained recovery we desperately need,” said Labour’s Chris Leslie.
Meanwhile a report from the Centre for Economics and Business Research out today said borrowing is so high the next government will have to cut spending whoever wins the election.
“In 2014-15 we expect borrowing to stand £10bn higher than the chancellor expects, at £107bn,” said the group.
“The financial markets will be stretched to the limits of their tolerance by these plans for extremely gradual fiscal tightening.
If this is combined with the prospect of a change in government after the next election that means even less fiscal tightening, we expect there would be a financial crisis.”
THE IMF’S PROPOSALS
Monetary policy needs to stay very loose, the IMF said.
It supports ultra-low rates in the UK and wants to see that stay in place.
It wants incoming governor Mark Carney to reassure markets rates will stay low until the recovery takes off, providing forward guidance on the Bank of England’s policy.
The IMF wants the government to counteract the £10bn of spending cuts and tax rises taking effect this year.
That means spending more in areas like infrastructure where the analysts say the government will get more bang for its buck.
It claims growth could rise from 0.7 per cent this year to 1.3 per cent with just a few billion more spent on infrastructure projects like social housing improvements.
The government also needs to take action to free up the construction industry.
The IMF worries it is very hard to build houses in the UK, so policies like Help to Buy which encourage borrowing will simply push up house prices if supply is not allowed to grow with demand.
It wants to make life easier for businesses – the IMF argues private investment is relatively highly taxed in Britain and wants more cuts there.
But that would be paid for by widening the VAT base. That could see taxes rise on areas like food, children’s’ clothes and energy.
The IMF also wants the government to sell its stake in RBS and Lloyds – even if it means offering to put more money in to get the banks in shape as fast as possible.