THE COALITION government will have to abandon its plan to slow the growth of the national debt if the economic recovery fails to pick up, the International Monetary Fund (IMF) said yesterday.
If unemployment stays high – the most recent data puts it at 8.1 per cent after plummeting in the three months to May – it could have serious repercussions on the economy in the long run, through deskilling and the loss of work ethic, the IMF said.
Given these long-term effects, known as “hysteresis”, the IMF warned that the UK cannot afford several more years of depressed output and employment. It suggested that if meaningful growth fails to appear, the UK must slow the pace of its fiscal consolidation.
But the main focus of the report was to extol the measures taken so far by the Treasury, particularly the reduction in the cyclically adjusted primary deficit from seven per cent of GDP in 2009/10 to 3.4 per cent of GDP in 2011/12.
“The UK government has made a strong commitment to fiscal consolidation,” said Alex Gibbs, IMF executive director for the UK, “It set out a clear and credible plan to put public finances on a sustainable path and created the independent Office for Budget Responsibility to monitor it.”
The IMF report agreed with the coalition’s focus on cutting expenditure rather than raising taxes, and heaped praise on various Treasury schemes to make austerity less painful, such as the so-called Plan for Growth and the National Infrastructure Plan.
In this vein it supported the government’s recently announced UK Guarantees scheme, but warned: “It is important that the choice of projects… is based on using public funds as efficiently as possible.”
Yet Brendan Barber of the Trades Union Congress pounced on the report. “This alarming health check on the UK economy from the chancellor’s favourite economic experts makes it clear that plan A is not working,” he said. “Continuing along this path could cause permanent damage to the economy. Even the Prime Minister has hinted Britain could face perpetual cuts,” Barber went on to say.
The Treasury claimed the report vindicated its approach of fiscal consolidation combined with “monetary and credit easing as well as government guarantees for infrastructure.”