Faisal Islam: What surprise praise for UK economy tells us about the Budget
On three occasions in the past 24 hours, top IMF officials have praised UK plans to reduce its annual levels of borrowing.
Faisal Islam: What surprise praise for UK economy tells us about the Budget
Kristalina Georgieva, the IMF managing director, has commended the UK’s strategy for cutting debt.
“Get your fiscal health in order,” is one of the central messages at the International Monetary Fund’s (IMF) annual gathering in Thailand.
The IMF is concerned about the debts carried by the world’s largest economies. As a watchdog, it is doing its job by identifying and warning about financial weaknesses.
At the same time, finance ministers from countries that have previously faced crises are pointing out how little their borrowing costs have risen compared with those of the world’s biggest economies, including the US.
Three times in the past 24 hours, senior IMF figures have praised the UK’s plans to reduce annual borrowing, going against the pattern seen across the rest of the G7, which includes Canada, France, Germany, Italy, Japan and the US.
The fact that the IMF is clearly viewing the UK differently from these major economies is striking.
“The UK is actually one country where action to reduce debt and deficit has been taken decisively and we see the UK in that sense enjoying a bit of a better growth prospect,” managing director Kristalina Georgieva said earlier.
Her remarks came after the IMF’s chief economist Silvana Tenreyro told me that UK borrowing cuts “stand out”.
The IMF’s twice-yearly review of global economic prospects showed that, among the G7, only the UK has a serious plan to consolidate annual borrowing over the next few years, amounting to nearly 4% of the size of the economy. The US, Germany and Japan are raising borrowing. Canada and Italy are keeping it unchanged.
The UK now appears to be the IMF’s model pupil, leading the G7 in reducing deficits.
That matters because for the past five years the UK has been on the bond market naughty step, often recording the highest borrowing rates in the G7 since the Liz Truss mini budget, as political and economic crises hit different governments.
Although this is positive for the chancellor and the Treasury, it also hints at the kind of Budget we can expect in a fortnight’s time. To keep debt-reduction plans on course, John Healey is likely to have little room for extra spending. He will want to pair that with only limited tax rises. There may be a slight reduction in the cushion for meeting debt rules — the so-called headroom. If that happens, it will be linked to building in protection against an expected rise in energy prices because of the ongoing Middle East conflict and its effect on the overall cost of living — the so-called global inflation shock.
That is likely to leave many public services disappointed, as they had been expecting cash injections to offset rising inflation, as the Institute for Fiscal Studies think tank suggested this week. It will also mean difficult public sector pay negotiations.
It will not be “austerity”, but the chancellor is likely to adopt the IMF’s description of a government with austere plans compared with other advanced countries. The first reward is avoiding the direct attention of the bond markets, whose full focus is now on others, such as France. The larger reward could be lower relative borrowing costs for the government and households.
In the end, forecasts are meaningless without solid plans behind them. Those plans will soon be there for everyone to assess.