By Kristalina Georgieva
Over the last week, we have been having virtual meetings for our Article IV consultation for the British economy.
We meet at a time when the UK and the world are in the grip of the worst pandemic in a century. It has already taken an enormous human toll and caused unprecedented economic disruption, including in the UK, and unfortunately we are seeing a second wave hitting Europe.
Let me start by recognizing the enormous efforts the UK authorities have made to contain the impact of the pandemic. 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.
My main message today is that continued policy support is essential to address the pandemic and to sustain and invigorate a recovery. We welcome that the authorities have committed to deliver it as long as necessary to manage expectations and boost confidence. The policy space exists to do this.
Let me highlight three key points:
- First, it would be important to keep the special job and company support programs in place until the direct impact of the pandemic on the economy subsides. This extended safety net will reduce scarring and temper the unequal effects of the crisis, and it can naturally sunset as the pandemic fades. Therefore, we support an additional fiscal push, necessary to enhance the safety net, but also to boost public investment. It offers an opportunity to “build forward” and address the UK’s climate targets, reduce regional inequality, and help those who do end up losing their livelihood.
- Second, while we do not think that policy rotation toward fiscal adjustment is imminent, it cannot be ignored either. It will be essential for the government to stabilize then reduce public debt ratios and begin to rebuild buffers. Still, experience suggests that rotation to fiscal consolidation should only happen once the private sector has durably picked up steam.
- Third, monetary policy should remain accommodative, given the significant risk that inflation will undershoot targets. This can be done by scaling up government bond purchases. Other tools like negative rates can be brought in after further understanding is developed on their application in the UK context.
Turning to the ongoing post-Brexit trade discussions, 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.
In sum, the UK economy is facing an extraordinarily challenging period. But the UK entered 2020 with advantages. It has strong institutions, highly credible fiscal and monetary policy frameworks, and flexible labor markets; households and corporations have strengthened their balance sheets since 2008; banks remain well capitalized and liquid. The UK has always risen to the challenges confronting it, and we have no doubt it will respond to the present challenges with its usual resolve.
Let me conclude by recognizing the UK’s wider global leadership on the COVID response, including vaccines and the contributions provided to the IMF for our low-income lending facilities, and for debt relief. These contributions will provide us with resources to help the least developed countries, who face great needs at present — helping them will also help reduce global instability for the benefit of all.