IMF Healthcheck: Prolonged weak growth likely

The IMF has cited some improvement in overall economic conditions, but has urged the government to do more to speed up growth in its assessment of the UK economy.

The IMF has has urged the government to do more to speed up growth but has not directly called on George Osborne to delay his spending cuts.

In its assessment of the UK economy, the IMF said that despite the coalition’s economic strategy earning it medium term credibility, planned fiscal tightening would act as a drag on growth.

“The key risk is that persistent slow growth could permanently damage medium-term growth prospects—this could arise if private sector deleveraging is larger than expected, credit conditions fail to improve, external demand does not pick up, and the drag from fiscal consolidation is greater than anticipated,” the report added.

The IMF’s growth recommendations are:

• Bringing forward planned capital investment where possible, which would help catalyze private investment and spur much-needed growth. Alongside this, well- designed public guarantees could be used to facilitate private investment.

• Further modifying the composition of consolidation to boost growth. This could include growth-friendly measures, such as reducing marginal effective corporate tax rates to bring investment forward, and introducing tax allowances for raising equity.

. To offset the budgetary impact of these measures over the medium term, the government could undertake a reform of property taxes and consider broadening the VAT base.

• The 2013 Budget announced a new scheme, Help To Buy, aimed at boosting activity in the housing market. This measure may temporarily help boost confidence in the housing market, but there is a risk that, in the absence of an adequate supply response, the result would ultimately be mostly house price increases that would work against the aim of boosting access to housing. To mitigate this risk and engineer a supply response, the government should consider fiscal disincentives for holding land without development.

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