UK could be forced to increase spending after no deal Brexit

Luke
MacGregor/Reuters

• 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.