Increased spending is advised if growth slows, but will George Osborne listen?
The International Monetary Fund has urged the government to roll back its austerity policies and increase infrastructure spending if the economy slows further.
While it commends the stability of the British economy in recent years, the report warns that rising house prices, high levels of personal debt, sluggish productivity growth and the EU referendum all pose significant risks to growth and stability.
If these weaknesses begin to take effect in the form of slower growth, the government is urged ‘to explore both revenue and expenditure measures, while protecting spending in priority areas, including healthcare, education, and infrastructure.’
At a meeting of G20 finance ministers in in Shanghai this week, the IMF will make similar recommendations to many members, encouraging ‘bold action’ to counter the current vulnerability of the world economy.
The mission statement for the meeting suggests that states are currently over-reliant on monetary policy, and that near-term fiscal measures should be implemented. Where there is fiscal space, as in the UK, increased investment ‘that boosts both the demand and the supply potential of the economy’ is advised.
This advice presents a challenge to George Osborne, whose unrelenting focus has been on reducing the deficit. Balancing the budget by 2020 is the justification offered for many of the most severe cuts of the ‘austerity chancellor’.
Critics have long argued that the government’s commitment to austerity is driven by ideology more than economic rationale, an argument that will hold greater weight if Osborne chooses to ignore the recommendations of the IMF.
The latest assessment of British GDP, released on Thursday morning, confirms that growth continued at 0.5 per cent in the last quarter of 2015, outstripping France, Germany and the US, and bringing GDP growth to 2.2 per cent for the year.
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