Greek-style Austerity Measures

IMF Warns Britain Must Reform Its Public Finances

Britain needs wholesale reform of its public finances to address the soaring costs of pensions and other spending commitments as well as the aftershock of the financial crisis, the International Monetary Fund has indicated.

October 6, 2010

London Telegraph - The next global crisis is likely to be born of the unsustainable promises Governments have made, which will threaten to undo the work on deficit reduction, the IMF said in its World Economic Outlook.

“The net present value of future increases in health care and pension spending is many times larger than the increase in public debt due to the crisis.”

Britain’s pension liabilties alone total £3.9 trillion – £1.2 trillion for public sector workers and £2.7 trillion for the state pension. The warning came as the IMF cut its growth forecast for the UK next year to 2pc, from its 2.1pc estimate in April. It expects growth this year to be 1.7pc, 0.5pc higher than the previous forcast.

Although the Washington-based body welcomed the numerous deficit reduction plans, it urged governments to speed up their implementation.

“So far, progress has been painfully slow. Fiscal consolidation needs to start in 2011,” it said. “This task is now more urgent than it was six months ago, as further fiscal accommodation could be needed in the short term if global activity slows appreciably more than projected.”

Global growth is expected to be 4.8pc in 2010 and 4.2pc in 2011, with a temporary slowdown during the second half of 2010 and the first half of 2011. Like the UK, the revised outlook is significantly stronger for 2010 but slightly weaker for 2011.

“Risks to the forecast are mainly to the downside,” the IMF added. “Households remain saddled with appreciable debt, the financial system remains vulnerable, and expectations could gradually catch up with actual inflation, putting further downward pressure on prices and wages.”

Fiscal consolidation is expected to reduce growth in the short-term but put countries back on a stable footing for long-term prosperity. However, the IMF has urged governments to use the crisis to go further than ever before, by reshaping the tax system and reforming public spending.

“Plans should emphasize policy measures that reform major, rapidly growing spending programs, such as pension entitlements and public health care systems,” the paper said. “There is also wide scope to improve tax structures, for example, by shifting the tax burden from earnings to consumption spending or property.”

It added that pension reforms could be a less immediately painful way of achieving consolidation plans.

“Ambitious entitlement spending reforms would deliver large credibility gains at a lesser cost in terms of short-term growth, they would also forestall a need for more painful reforms in the future,” the IMF said.

The global recovery will require both internal “rebalancing of demand from public to private sources in advanced economies” and an external rebalancing of deficit and surplus nations. Banks still pose a risk to the recovery as “insufficient progress with repair and reform [of financial services] is weighing on credit and slowing the normalization of monetary and fiscal policies.”

In addition, “any renewed turbulence in sovereign debt markets could trigger an adverse feedback loop between sovereign debt markets and the financial sector, inflicting major damage on the recovery.”

In the UK, the IMF added, “domestic demand is expected to remain relatively subdued, particularly following the recent measures to cut the budget deficit.”

The global recovery will be led by emerging markets.

“Output of emerging and developing economies is projected to expand at rates of 7.1pc and 6.4pc in 2010 and 2011, respectively. In advanced economies, however, growth is projected to be only 2.7pc and 2.2pc, respectively,” the report said.