In its annual health check of the UK economy the IMF said the recovery was underway, unemployment had stabilised and the health of the financial sector had improved.
Calling the government’s deficit reduction plan “appropriately ambitious” the IMF report said: “The government’s strong and credible multi-year fiscal deficit reduction plan is essential to ensure debt sustainability.” It added the plan “greatly reduces the risk of a costly loss of confidence in public finances and supports a balanced recovery.”
Fiscal tightening would dampen short-term growth, said the report, but not stop it as other sectors of the economy emerged as drivers of recovery, supported by continued monetary stimulus.
The backing of the IMF will come as a huge vindication of chancellor George Osborne’s proposals to cut public spending by £83bn in order to get the £155bn budget deficit under control. The chancellor will reveal where the cuts will come when he announces the results of the comprehensive spending review on 20 October.
The chancellor welcomed the IMF report saying: “They have made it pretty clear that the deficit reduction plan that we have set out is essential for bringing about sustainability in our budget. It reminds us that if we divert from the course the new government has set out then we really will be heading back into a disastrous period of economic instability for Britain.”
The report puts the new Labour leader, Ed Miliband, under immediate pressure ahead of his conference speech today. Earlier this week the Labour leader described the government’s policies as “economically dangerous” and called for deficit reduction “at a cautious pace in a way that is going to help our economy, not hinder it”.
But while there were risks to economic recovery given the “continued fragility of confidence and “signs of renewed housing market weakness,” the IMF predicted GDP growth would be two per cent in 2011, rising gradually to 2.5 per cent the following year. Inflation should also fall back to the government’s two per cent target by early 2012.
In another boost for the government the IMF said financial sector reform ”would be crucial to move to a safer system that featured stronger capital and liquidity buffers, supported by tighter regulation and supervision.