GROWTH prospects in the UK will be helped over the long-term if George Osborne cuts income taxes, Carlo Cottarelli, director of the International Monetary Fund’s (IMF) fiscal affairs department said yesterday.
“Tax is too high in Europe as a whole, and is damaging economic growth. Taxes should be reduced as long as spending is cut in line with that,” he added.
Cottarelli was unveiling the IMF’s latest fiscal monitor.
It warned that high levels of government debt – above around 80 per cent of GDP – reduce GDP growth and urged governments to tackle their deficit problems.
“Government debt across the G7 nations is at levels not seen since the aftermath of the second world war,” he warned. “But this time the situation is worse – populations are older with more pensioners to support, and in terms of issuing bonds investors have far more options when choosing where to put their money.”
Cottarelli specifically argued that southern European nations had to free up labour markets, reduce the overall size of their public sectors and promote competition in both services and goods.
In terms of tax regimes, the report recommends countries consider a “fiscal devaluation.”
By reducing income and social security taxes and raising consumption taxes, goods exported become cheaper to foreign buyers whilst imports become more expensive to domestic consumers – and, the IMF hopes, the move does not change overall tax revenues.
Fiscal devaluation will not solve all the problems of an uncompetitive economy, the report said, but may create a temporary improvement.