Britain could be forced to increase government spending in a no-deal Brexit, IMF says
- Britain may have to increase government spending in the event of a hard Brexit to protect UK citizens from the worst economic impacts of such an event, the International Monetary Fund (IMF) said.
- In a report released ahead of the IMF's annual conference, this year held on the Indonesian island of Bali, the fund said that the UK's "pace of fiscal consolidation can be eased if risks materialize and growth slows sharply."
- The IMF also downgraded its outlook for the world economy, citing rising interest rates and growing concerns over a US-China trade war
Britain may have to significantly increase government spending in the event of a hard Brexit to protect UK citizens from the worst economic impacts of such an event, the International Monetary Fund (IMF) said on Tuesday.
In a report released ahead of the IMF's annual conference, this year held on the Indonesian island of Bali, the fund said that the UK's "pace of fiscal consolidation can be eased if risks materialize and growth slows sharply," an outcome likely in the event of a no-deal Brexit. That's a technical way of saying Britain's spending can go up in times of economic strife.
The IMF also said Monday that the global economy will grow 3.7% this year, the same as in 2017 but down from the 3.9% it was forecasting for 2018 in July. It slashed its outlook for the 19 countries that use the euro currency and for Central and Eastern Europe, Latin America, the Middle East and Sub-Saharan Africa.
The IMF's position on Britain runs somewhat contrary to the position of UK Chancellor Philip Hammond, who has previously said that fiscal stimulus in the event of a hard Brexit would be impossible because of the UK's fiscal position, which includes high levels of government debt and a substantial deficit.
The report also urged the Bank of England to be flexible with regard to monetary policy in the event of a no deal Brexit.
"At a time of heightened uncertainty, monetary policy should remain flexible in response to changing conditions associated with the Brexit negotiation," the IMF said. Once again, that position runs contrary to the Bank of England which has said that it would most likely increase interest rates after a no deal Brexit.
The IMF's call for fiscal stimulus after a no-deal Brexit comes just three weeks before Hammond delivers his Budget, in which he is expected to loosen the UK's purse strings after 10 years of post-crisis austerity, following calls from Prime Minister Theresa May to do so.
"People need to know that the austerity is over and that their hard work has paid off," May told the Conservative Party conference last week.
In its report, the IMF also warned the UK that it should make significant efforts to protect its trading relationship with the EU, saying any lessening of relations "would imply sizeable losses for the UK economy and, to a lesser extent, for its trading partners, with negative impacts concentrated in countries with the largest trade links with the United Kingdom."
This is not the first time the IMF has waded in on the Brexit debate. Prior to the referendum, it strongly opposed the UK leaving the EU on economic grounds, and late last year it said that leaving the European Union has "the potential to reshape the structure" of the British economy.
"The impact will depend on the nature of the final agreement, and may take many years to fully materialize. However, in the coming years agriculture, manufacturing and services will all be affected by changes in the trade framework, regulatory structure and labor market," the fund's concluding statement after a visit to the UK in December last year said.