The coronavirus crisis is set to bring more longer-lasting damage to the UK economy than any other country in the G7, the IMF has warned.
The fund on Tuesday said its global forecasts showed that while most advanced nations would return to the economic growth expected before the pandemic struck, Britain’s economy would still be 3 per cent smaller in 2024.
These large scars to the British economy, matched in recent days by forecasts from the Institute for Fiscal Studies and Citigroup, will force Rishi Sunak to use the new taxes he is raising to pay for the legacy of the pandemic rather than improving health and social care.
The IMF also forecast the chancellor would go into this month’s Budget without being able to point to sustained falls in public debt by the middle of the decade.
Although the IMF’s forecast painted a sombre picture of the UK’s economic prospects in the medium term, the global organisation highlighted the rapid growth achieved by Britain this year as the economy bounced back from 2020’s steep decline, leading to the risk of high inflation.
It attributed the strong 2021 growth forecast to the UK’s successful early Covid-19 vaccination programme and the depth of the economic recession last year.
Sunak hailed the IMF’s forecast for this year as he travelled to Washington to the fund’s annual meetings, without addressing the poor performance of the UK in the IMF tables across the whole pandemic.
“These new forecasts show the strength of our recovery, with the UK having the fastest growth forecast in the G7 this year. Our plan is working,” the chancellor said.
The IMF’s full forecasts show a gloomier picture of the recovery. It forecast that the US, Canada and Japan would have higher output in 2024 than it expected before the pandemic started in its autumn 2019 forecasts.
There would be only small long-term scars in Italy, Germany and France, the IMF added, while the UK was at the bottom of the G7 league table with output 3 per cent below the fund’s 2019 expectation by the middle of the decade.
At the same time, it expected UK government borrowing to remain above 3 per cent of national income, preventing the chancellor from meeting his budgetary ambition to balance the current budget excluding investment by the next election. General government net debt will also still be rising as a share of national income by 2026, according to the IMF’s forecasts.
Gita Gopinath, the IMF’s chief economist, said there was “high uncertainty” over its forecasts. The Office for Budget Responsibility might take a different attitude to economic prospects, making the chancellor’s task in the Budget less arduous.
But if the fiscal watchdog takes a similar stance to the IMF, the chancellor will have very limited room for manoeuvre for additional public spending to help the recovery in public service provision and little scope for the tax cuts before the next election.
The IMF also warned that the global economy faced high inflationary risk and called on central banks to be “very, very vigilant” and take early action to tighten monetary policy should price pressures persist.
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