IMF wants Brown to cut down on spending

IMF wants Brown to cut down on spending
WASHINGTON: The International Monetary Fund has advised Brit chancellor of the exchequer Gordon Brown to avoid tax increases in the next budget and instead put a restraint on public spending in order to consolidate public finances.

The IMF put forth a generally positive view of the country's economic performance in its article IV consultation, in conclusion of the preliminary annual review of the U.K.'s economy and felt there is a high degree of convergence between its views and those of the treasury. One of the points of disagreement, however, was the housing market, which the treasury felt is balanced, while the IMF said the prices were overvalued and the industry faced the prospects of an abrupt downward adjustment.

The IMF said its revised growth rate of 2.9 per cent for 2007 and 2.7 per cent for 2008 were in consonance with the projections of the treasury. It also said the openness and flexibility of the economy had helped it to benefit from globalization. However, it warned that the openness could also expose the country to downside global risks.

The IMF said the Bank of England's action to contain inflation by increasing borrowing costs on three occasions has been appropriate, though there is action still required to contain the energy-price-related increase in inflation.

However, the IMF report did not spare the treasury on public finances. It said rapid growth in public spending had led to rising public debt and a sharp deterioration in the fiscal balance. It told the treasury to curb spending growth and make "disciplined choices" in the Comprehensive Spending Review, which is the three-year settlement the government is announcing this year. It said, "Over the next few years, reducing the overall fiscal deficit will be essential to halt the increase in the ratio of net debt to GDP."

The net public debt could rise from 36.4 per cent of national income in 2005-06, to 39 per cent or more from 2008-09 -- above the treasury's forecast, it said. This created doubts on the government's ability to keep net debt below its self-imposed 40 per cent limit at all times.

It accepted that there has been a reversal process seen in 2005-06, with the cyclically-adjusted overall balance relative to GDP having improved by 0.75 percentage points over two years.

The IMF also advised that there is need to press the case for wage restraint in order to avoid a spike in inflation fuelling a wage-price spiral.