IMF Approves UK Tax and Economic Decisions

November 10, 2010 Taxation in UK

UK FlagThe International Monetary Fund has concluded its annual assessment of the UK economy and fiscal plans, largely approving the Government’s changes to the tax system, economic policies and handling of the effects stemming from the financial crisis.

According to a new International Monetary Fund (IMF) assessment after six consecutive quarters of economic contractions and fiscal instability, the UK has begun to shows signs of a supported, balanced and sustainable recovery. This conclusion was drawn by the IMF Executive Board in its latest annual economic assessment of the country, released on November 9th.

From mid-2009 to mid-2010 the UK’s overall budget deficit reached 11 percent of GDP, one of the highest in the world, according to the IMF. However, the Government’s effective use of tax policy and spending cut-backs is expected to reduce the budget deficit to an acceptable level by 2015. The reduction has been supported by the Bank of England’s (BoE) decision to maintain the national interest rate at near-zero levels, carryout asset repurchases to boost market confidence, ease corporate credit supplies, improve financial stability and household net wealth. The perceived positive actions have led the IMF to project GDP growth levels of 1.7 percent for 2010 and 2 percent for 2011.

Among other achievements, the IMF report praised the Government’s of tax and expenditure measures in tackling the deficit problem. It was conceded that lowering tax rates would have boosted short-term economic growth, but the currently instated levels are more appropriate for ensuring sustainable long-term growth. In the face of the economic recovery, the UK was warned against becoming complacent in its policy actions and plans, with the IMF suggesting that temporary tax measures be made ready in the case of a sudden and unexpected economic downturn. Specifically, bank-levies, the Valued Added Tax (VAT) rate and the capital gains tax levy should be decreased if the economy shows signs of a significant and sudden slow-down.

The IMF report noted that the UK economy’s current output levels are up to 3.9 percent below the country’s theoretical capacity. Any sudden improvement of the productivity figure could send destabilizing shocks throughout the entire economy. The IMF has suggested that the UK be prepared to readily implement an increased national interest rate or raised tax rates, in order to cap any unsustainable growth.

Photo by micora