Is Austerity Finally Bringing Growth to Britain?

After warning Great Britain of dire circumstances last year if it continued austerity, the International Monetary Fund has rolled back the rhetoric this time, omitting its request that the British government slow its budget contraction further.

Last fall, International Monetary Fund Deputy Managing Director David Lipton told the British government, “Our view has been that doing nothing is not a good answer given the problems that could arise when very, very low growth becomes entrenched.” Mr. Lipton warned against trying to solve budget problems too quickly, as a lack of growth puts disproportionate pressure on cutting. “The world has changed in that countries are finding they face fiscal consolidation challenges in an ever weakening global growth environment,” he said.

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However, this time around, the IMF was not so confident in its prior warning, retracting the calls to slow down fiscal austerity. Recent economic data in 2013 appears to provide British Chancellor of the Exchequer George Osborne some breathing room in his push for fiscal tightening. The UK economy grew by 0.3 percent in the first three months of 2013, with expansion of the service sector and recoveries in their North Sea oil and gas output rescuing the country from recession.

With this momentum in his court, the IMF changed its previous recommendation, instead asking only that “judgments about fiscal policy [balance] debt sustainability with growth concerns.” As such, the Fund suggested that the focus move to the supply side of the economy, noting the need to expand capital investment inside the UK. It noted that the recent economic news was “encouraging” but that the U.K. is “a long way from a strong and sustainable recovery.”

The IMF did express concern over some aspects of U.K. policy, though. Specifically, the “Help to Buy” program, whereby home buyers can get equity loans and mortgage guarantees through the government. There are worries that this sort of program can cause inflation in property prices without an increase in the overall supply of houses. This fear prompted the IMF to recommend that the government look for ways to enact “fiscal disincentives” for property holders who choose not to develop it.

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Moreover, the IMF suggested that the nation’s partially nationalized banks be privatized, perhaps with capital backing from the government in the case that they need to be made more appealing to private investors. The report also included a recommendation that the Bank of England be granted the authority to limit loan-to-value and loan-to-income ratios on mortgages, in an attempt to further avoid bubbles in property values.

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