IMF forecast blows hole in George Osborne’s deficit reduction plan

Britain’s next government will face a tougher time than expected reducing Whitehall’s annual spending deficit, according to the International Monetary Fund, which said lower tax receipts and uncertainty surrounding the election would undermine growth forecasts.

The Washington-based organisation said the current prediction of a £7bn surplus in the last year of the next parliament would instead be a £7bn deficit. The forecast blows a hole in George Osborne’s hopes that keeping to strict public spending limits for the next five years will deliver a surplus.

The Office for Budget Responsibility, which uses Treasury figures to make its forecasts of the public finances, says the UK is due to reach a surplus by 2019 under current plans.

But the IMF warned that its officials took a gloomier view of the UK’s growth prospects over the next five years. Government spending may also need to be higher on welfare and tax credits than predicted by the OBR while the country gets back on track.

“On the expenditure side, given uncertainties pertaining to the May elections, a slightly slower pace of consolidation than that in the [2015] budget is assumed for 2015/16 and beyond,” it said.

Earlier this week the IMF warned that the UK’s stellar growth was due to slow from 2.7% this year to 2.3% in 2016. A judgment on the likelihood of a messy outcome to the election was behind that forecast, which it said would have knock-on effects for several years to come.

The warning came as the IMF urged developed nations to capitalise on low oil prices by raising energy taxes and using the windfall to cut income taxes.

It said the collapse in the oil price since last summer provided a chance to shift the burden of tax away from wages to help poorer workers left behind in the recovery.

In its six-monthly monitor of government finances across member countries, the IMF said finance ministers should “seize the opportunity created by falling oil prices” to support initiatives that combat climate change and “provide breathing room for rebalancing the tax burden, for example, by lowering taxes on labour to boost employment”.

In addition, developing economies should reduce energy subsidies that keep the cost of petrol artificially low “to provide space for productive spending on education, health and infrastructure, as well as for programmes to benefit the poor”, the report said.

The call from the IMF reflects growing concerns at an expected rise in greenhouse gas emissions now that energy consumption is cheaper. In the past five years the UK has seen falling emissions, largely as a result of a decline in economic activity brought on by high oil prices.

Adding to the improving environmental picture, the AA has documented a sharp drop in road miles travelled by car drivers since the financial crash. Until recently that was thought to be a “new normal” as motorists changed their habits, but campaigners fear that the 50% decline in oil prices will spark a return to old ways.

The IMF has long been concerned about stagnation in wages across Europe, the US and much of the developing world. It sees the switch in taxes away from wages to energy as killing two birds with one stone.

Unfortunately for green campaigners, recent experience in the UK, where the coalition government has frozen the duty on petrol in successive budgets, has shown the popularity of holding down the cost of fuel for transport. Low-income groups have also benefited from lower heating bills, while businesses have used lower fuel bills to cut transport costs.

The promise of lower income taxes at the expense of a return to energy bills nearer the levels seen before the collapse in oil is likely to be met with voter scepticism. With most governments under pressure to reduce outstanding debts, there will be concern that the money will be diverted to support government spending before it is used cut income taxes.

The IMF’s warnings about the negative effects of the falling oil price could heighten these fears after it said the contribution of lower energy bills to inflation made it more difficult for governments to reduce debt levels.

Vitor Gaspar, the IMF’s head of fiscal policy, said that while the recovery was supported by lower oil prices, looser monetary policy and a relaxation of austerity measures in most countries, risks to government finances had grown since last year.

Inflation reduces the value of outstanding debt and makes it easier for governments to finance. With inflation at zero across much of Europe, including the UK, debt levels remain stuck unless ministers can agree a budget surplus.

The former Portuguese finance minister said: “High public debt levels pose headwinds to growth. They also raise concerns about debt sustainability in some advanced economies. Furthermore, inflation is below target by a large margin in many countries. This makes the task of reducing high public debt levels more difficult.”

Powered by article was written by Phillip Inman in Washington, for The Guardian on Wednesday 15th April 2015 19.57 Europe/London © Guardian News and Media Limited 2010


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