LONDON: Britain requires further monetary easing to aid the economy and Chancellor of the Exchequer George Osborne should prepare for temporary tax cuts, the International Monetary Fund said.
With the economy mired in its first double-dip recession since the 1970s, the Bank of England and the Treasury should introduce policies to underpin demand and unclog the financial system, the Washington-based lender said in its annual review of the U.K. published today.
The central bank needs to inject further stimulus through bond purchases or by cutting interest rates, with tax cuts following as soon as the fall.
The call for action was accompanied with praise for existing deficit-cutting plans, which the IMF said had gained the credibility of investors and lowered government borrowing costs. Should monetary tools fail, Osborne should look at temporary cuts in sales and payroll taxes and more spending on infrastructure, it said.
Changing tack in the face of a deteriorating economy would outweigh any loss of credibility with financial markets so long as the government has a longer-term plan to restore fiscal health, the IMF said.
Options for boosting lending to households and businesses include the central bank, under instruction from the Treasury and using the government balance sheet, buying mortgage-backed covered bonds and restarting liquidity programs for banks, the IMF said.
Britain had an underlying budget deficit of 13.8 billion pounds (US$21.8 billion) in April, the first month of the fiscal year as the slowdown subdued tax receipts. The figure, which excludes support for banks, compared with 9.1 billion pounds a year earlier, the Office for National Statistics said today.
Osborne should consider borrowing more money to spend on infrastructure, the IMF said. It also suggested options to lower private-sector borrowing costs, including the purchase of private-sector bonds through the central bank and the provision of longer-term bank funding facilities against a broad range of collateral.
The IMF assessment contrasted with a separate review today by the Paris-based Organization for Economic Cooperation and Development, which said Osborne was right to push ahead with his budget cuts and that the central bank stimulus program is “appropriately providing strong support to the economy.” (Bloomberg/T05/aph)