HM Treasury News Release
86/97 22 July 1997
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IMF HAILS GOVERNMENT'S "EXCELLENT START"
"The new government has made an excellent start." That is the
opening remark of the International Monetary Fund after its annual
Mission to review Britain's economy. They say:
"The new government has made an excellent start. It has set
a high standard for its economic policies, aiming to maintain
stability and foster long term growth while seeking fairness
and developing human potential. And it has taken decisive
steps toward these goals by making the Bank of England
independent, introducing a budget that makes rapid strides
toward sound public finances, and initiating Welfare-to-Work
and other programmes to enhance employability."
The Chancellor Gordon Brown, welcoming the conclusions of the IMF's
Mission, said:
"This is a ringing endorsement of the Government's economic
policies from the world's most respected international
monetary body."
The IMF continued:
"These [economic] policies are timely, as the environment is
becoming challenging. .... With output now close to
potential and the associated risks of rekindling inflation,
the economy faces a period of increased uncertainty.
"Encouragingly, the fiscal and monetary policies now in place
should alleviate these tensions significantly. In particular,
we judge the July budget to be more to the point in this
regard than sometimes supposed. ....it is difficult to
criticize the magnitude of the overall up-front fiscal
correction. Firm implementation, particularly through
observance of the control totals for spending this year and
next, should boost credibility, slow the upswing, and set the
public finances on a sound medium-term track.
"The recent series of monetary tightening moves was overdue
and, despite the help from the budget, the current situation
will keep policy makers on their toes. ....All in all, with
the economy possibly moving well beyond potential further
action will likely be required, although with substantial
fiscal and monetary tightening in the pipeline interest rates
may not need to rise as far as markets expect.
"Turning to medium term issues, the government's objectives of
promoting stability and encouraging investment in physical and
human capital in the context of a fair society are the common
thread of a broad range of initiatives."
"The government's positive approach to European issues is
welcome: the United Kingdom's perspectives can provide
constructive input in EU discussions. Likewise, the recent
opening of a thorough national debate on economic aspects of
EMU was overdue.
Notes for Editors
1. As part of its normal surveillance work, the IMF makes a
regular yearly assessment of the UK economy along with other Member
States. The full text of the IMF's Concluding Statement following
its United Kingdom - 1997 Article IV Consultation is below.
2. IMF surveillance of every member economy is carried out
primarily through annual discussions between Fund staff and member
governments and central banks, called Article IV consultations.
The resulting reports are discussed at the IMF's Executive Board.
The Board also conducts multilateral surveillance through regular
discussions of developments in the world economy and key exchange
rates. A report on the world economy is published twice a year.
("World Economic Outlook", IMF, April 1997 is the latest).
3. If you have access to the Internet you can find this release at
"htpp://www.hm-treasury.gov.uk". Material on other Treasury
matters can also be found at this address.
United Kingdom 1997 Article IV Consultation
Concluding Statement of the Mission
1. The new government has made an excellent start. It has set a
high standard for its economic policies, aiming to maintain
stability and foster long-term growth while seeking fairness and
developing human potential. And it has taken decisive steps
toward these goals by making the Bank of England independent,
introducing a budget that makes rapid strides toward sound public
finances, and initiating Welfare-to-Work and other programs to
enhance employability.
2. These policies are timely, as the environment is becoming
challenging. Behind the impressive macroeconomic
performance strong growth, declining unemployment, and low
inflation there now loom imbalances rooted in powerful divergent
forces: surging domestic demand, which may accelerate further as
"windfalls" boost consumption; and the incipient weakness of the
tradable goods sector resulting from the strength of sterling.
With output now close to potential and the associated risks of
rekindling inflation, the economy faces a period of increased
uncertainty.
3. Encouragingly, the fiscal and monetary policies now in place
should alleviate these tensions significantly. In particular, we
judge the July budget to be more to the point in this regard than
sometimes supposed. The fiscal position (as measured by the
economically more meaningful financial deficit) is set to improve
this year by a full 2 1/2 percent of GDP, of which we expect the
immediate policy-induced impact on demand to be about half. While
the budget measures could have been tilted more heavily against
current consumer spending (particularly in view of earlier cuts
in income tax), it is difficult to criticize the magnitude of the
overall up-front fiscal correction. Firm implementation,
particularly through observance of the control totals for
spending this year and next, should boost credibility, slow the
upswing, and set the public finances on a sound medium-term
track.
4. The recent series of monetary tightening moves was overdue
and, despite the help from the budget, the current situation will
keep policy makers on their toes. Looking forward, the strength
of sterling complicates the task: as it appears unsustainable
and, according to market expectations, temporary the extent to
which it will help slow the economy is uncertain. All in all,
with the economy possibly moving well beyond potential further
action will likely be required, although with substantial fiscal
and monetary tightening in the pipeline interest rates may not
need to rise as far as markets expect.
5. The new monetary policy framework appropriately makes the
Bank of England fully accountable for achieving the inflation
target and maintains transparency. However, accountability should
not detract from due emphasis on the inherently forward-looking
nature of inflation targeting. It would be helpful in this
context for the framework to reincorporate explicitly the two
year policy horizon. This would recognize the lags with which
policies take effect and reflect prevailing practice.
6. Turning to medium-term issues, the government's objectives
of promoting stability and encouraging investment in physical and
human capital in the context of a fair society are the common
thread of a broad range of initiatives. As the government fleshes
out its policies, there will be a need for careful coordination
to ensure that policy interactions are taken fully into account.
In particular:
- We welcome the emphasis on labor market flexibility (both at
home and abroad) and the associated initiatives to increase
employability while reforming taxes and benefits so as to
strengthen work incentives. The Welfare-to-Work program seeks to
address structural unemployment head on, but skillful
implementation will be required if its ambitious objectives are
to be realized. We are more doubtful about the national minimum
wage a blunt instrument for achieving a fairer income
distribution and a two-edged sword for rewarding work if set too
high. At a minimum, as the experience of other countries shows,
lower rates should be specified for youths to alleviate adverse
employment effects.
- Higher investment will require higher national savings, in
which public saving plays a key role. While the golden rule is a
step in this direction, it only addresses the financing of public
investment. It would be desirable in our view for the government
to aim for a more ambitious objective--balance over the cycle--
that would release additional resources for private investment.
Indeed, the government's projections for the public finances show
balance being achieved in the medium term. The government can
also contribute by shifting its own spending priorities toward
investment decisions on which will be improved by the move to
resource accounting.
- Boosting national savings also calls for action on the tax
system. The measures taken with regard to advance corporation tax
credits, and the intention to review areas such as corporate and
capital gains taxes, pensions, and savings accounts are welcome.
An integrated approach is important to ensure that overall
distortions are reduced and incentives for aggregate saving are
enhanced. Savings could also be fostered by broadening the
taxation of consumption. In this regard, while we are aware that
successive governments have foresworn significant broadening of
the VAT base, this is an issue that warrants serious economic
debate, all the more so given the hard choices that lie ahead in
reconciling spending priorities.
- This reconciliation will be facilitated by the Comprehensive
Spending Reviews, and the envisaged high level coordination
should ensure their effectiveness. The government's willingness
to consider radical approaches in areas such as social security
will be important to ensure consistency between overall fiscal
objectives and commitments to raise spending in priority areas
such as health and education.
- Plans to integrate financial oversight promise to focus
accountability and thereby strengthen supervision. Their design
needs to ensure that the Bank of England can continue to fulfill
its financial and monetary stability mandates after it sheds its
front-line supervisory role.
7. The government's positive approach to European issues is
welcome: the United Kingdom's perspectives can provide
constructive input in EU discussions. Likewise, the recent
opening of a thorough national debate on economic aspects of EMU
was overdue.
8. The government's pledge to start to reverse the decline in
the United Kingdom's aid spending and its support for the goal of
reducing world poverty are welcome. Consistent with this goal,
the United Kingdom is urged, together with other major countries,
to administer policies on military sales to developing and
transition countries in a way that avoids encouraging
unproductive expenditures and heightening security tensions.