Britain should boost spending to tackle the second wave of the Covid-19 pandemic without worrying about its growing debt levels, the International Monetary Fund has said.
In its six-monthly health check of the UK economy, the Washington-based organisation warned on Thursday that the UK faced a difficult winter that was likely to depress economic growth and increase the number of jobs lost, especially among those with few skills.
In its latest forecast for the UK economy, the IMF said it expected a decline in GDP growth of 10.4% this year, compared with an estimate a month ago of -9.8%. An expected rebound in GDP growth next year was pared back from 5.9% to 5.7%.
The IMF said the UK government had the capacity to increase spending on social protection and infrastructure investment to limit the impact on the economy of the winter surge in coronavirus cases. The report also urged the Bank of England to inject further funds into the economy to keep interest rates low and bolster business and household confidence.
With only a few weeks left to negotiate a Brexit deal with Brussels, the IMF’s managing director, Kristalina Georgieva, said the EU and UK should agree a settlement or risk lasting damage that would make an already difficult situation worse.
“We strongly encourage the UK and EU authorities to make every effort to reach an agreement. Progress on a range of issues has been made over the past year and there is room for a compromise beneficial to both sides.
“A solution would remove important downside risks from the outlook. Regardless of the outcome, it will be important to prepare the economy, firms, and people,” she said.
Georgieva also praised “the enormous efforts the authorities have made to contain the impact of the pandemic in the UK”.
“The unprecedented package of fiscal, monetary, and financial sector support measures has helped to sustain incomes, keep unemployment down, and curb corporate insolvencies.
“It is one of the best examples of coordinated action that we have seen globally. We welcome the continuing efforts the government has made to refine its support measures, including adaptations to the Jobs Support Scheme announced last week.”
However, the increased debt levels among many UK companies and the likelihood that some will go bust over the coming months should be tackled to prevent a steep rise in unemployment, Georgieva said.
“We support an additional fiscal push, centred on public investment and enhancing the safety net. This represents an opportunity to ‘build forward’ and address the UK’s climate targets, reduce regional inequality, and help those who do end up losing their livelihoods,” she said.
In the wake of the 2008 financial crash, the IMF had warned the UK against spending increases and endorsed the then chancellor George Osborne’s austerity programme. However, under Georgieva’s leadership, the organisation has revised its thinking and throughout the pandemic has urged the UK and other rich nations to boost spending to minimise the economic damage caused by the virus.