The government sets its face against a Comprehensive Spending Review this year. But the IMF warns strongly that the road ahead must be signposted soon or the Britain runs the risk of being unable to borrow.
Gordon Brown is playing with fire.
Christina
TELEGRAPH 17.7.09
IMF warns pound could be at risk from uncertainty
The International Monetary Fund (IMF) has warned that Gordon Brown risks a run on the pound if he does not set out a clear path for reducing national debt.
By Angela Monaghan
In a report published yesterday following a staff mission to Britain in May, the IMF said that a "credible plan" was needed to reverse the rapid deterioration of the public finances if confidence in the UK was to be upheld.
"Market conditions suggest the UK has been getting the benefit of the doubt, both in the Government bond market and also the foreign exchange market," said Ajai Chopra, the IMF's mission chief for the UK. "This benefit of the doubt is not going to last forever and it's going to be important that the Government does not test the limit of the market's confidence.
"The authorities will need to move more aggressively in their fiscal consolidation plans and to be specific it will be important to set public debt on a firmly downward path faster than is envisaged in the 2009 Budget," he added.
The IMF said the structural fiscal position was weak even before the financial crisis erupted and predicted gross debt is set to double over the next five years to 100pc of gross domestic product.
George Osborne, the shadow chancellor, said: "The IMF could hardly have delivered a more damning verdict on the Brown years - and it vindicates Conservative warnings about the debt crisis."
Mr Chopra said that although that it was too soon to impose fiscal tightening, specific plans should be formed now so that they could be implemented once economic recovery was under way. The IMF predicts the UK economy will shrink by 4.2pc in 2009 before growing 0.2pc in 2010.
The report added: "Should fiscal sustainability come into question, interest rates would rise despite monetary easing efforts, the ability of the Government to provide support to the financial sector would be severely limited and pressures on the currency could emerge."
Mr Chopra said the Government had been "ahead of the curve" by introducing bold policies, and said the authorities' focus must remain on strengthening the banking system, injecting more capital if necessary.
He added the banking system was still too weak in its current state to support a strong recovery in the UK.
Separately, the Prime Minister yesterday defended his response to the banking crisis and the decision to preserve the tripartite regulatory system where the Treasury, Financial Services Authority and the Bank of England each have a role. Mr Brown denied that Mervyn King, the Bank's Governor – who wanted the Bank to gain new powers – had become a "loose cannon" when asked by MPs.
"The Governor does a good job and people recognise his talents, and that's why he was reappointed for a second term," Mr Brown said.
The Herald (Glasgow) 17.7.09
Brown’s spending position branded dishonest
MICHAEL SETTLE, UK Political Editor
THE Conservatives last night turned up the heat over the UK Government's positioning on future spending cuts by branding Gordon Brown "dishonest".
Just 48 hours after Lord Mandelson, the Business Secretary, warned there would be less spending in certain parts of government, "pressures" on expenditure and "constraints for the next decade", the Prime Minister failed to admit there would be cuts under a future Labour government and instead talked of "tough choices" and a change of the spending "profile" after 2011.
Mr Brown's tone and content contrasted with that of both Lord Mandelson and Sir Gus O'Donnell, the Cabinet Secretary and head of the UK's civil service, who admitted he could "envisage a situation" where there were "deep dives" in spending for some Whitehall departments.
Asked about reports that departmental mandarins had been preparing for "doomsday" cuts of up to 20%, Mr Brown told yesterday's session of the Commons Liaison Committee that the idea was "quite ridiculous".
"You must not believe everything you read in the newspapers," he said.
However, he did accept that some elements of budgets, such as capital spending, were due to go down as money had been brought forward to tackle the recession.
"The profile of public spending will be different in the years to come. There will be tough choices that have to be made," he said.
Mr Brown explained that his first priority was to steer the economy back to growth and to reduce unemployment, which rose by a record 281,000 to 2.38 million in the three months to May.
Ministers, he pointed out, had identified £9bn of efficiency savings in back-office functions and income from this process, and the sale of assets would be channelled towards frontline services.
The PM also suggested there was little prospect of a comprehensive spending review being held soon, although there are indications from the Treasury that Chancellor Alistair Darling could flesh out some projections in the pre-Budget report expected in November.
Mr Brown pointed out that it was only 15 months since the last major review was completed and stressed how the government could not currently know whether cuts would be needed.
Last night, George Osborne launched a full-blown attack on the Prime Minister, saying: "Gordon Brown's dishonesty is becoming an embarrassment for the whole government. His claim that cuts can be avoided is now openly challenged by the Cabinet Secretary and the Chancellor.
"He dismisses newspaper reports the civil service are contemplating 20% cuts but those reports come straight from the mouth of Gus O'Donnell."
BBC ONLINE 17.7.09
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Recovery uncertain
Meanwhile the IMF, in its annual assessment of the UK economy, has warned the "speed and strength of the recovery remain highly uncertain".
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Gordon Brown's dishonesty is becoming an embarrassment for the whole government
George Osborne, Shadow chancellor
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While welcoming plans to change banking regulation and noting some "moderately encouraging" early results from quantitative easing - it warned there were still some "sizeable" vulnerabilities - such as a sharp increase in government borrowing.
"To limit ... risks and increase resilience to shocks, the authorities need to commit to a credible plan to reverse the deterioration of the fiscal position in the medium term and build a broad public consensus around a concrete consolidation plan," it said.
The IMF said a Comprehensive Spending Review would be "an opportunity for committing to concrete expenditure measures" - Lord Mandelson has suggested there would not be a CSR until after the next election, although the chancellor has suggested there could be one.
Debt crisis
Mr Brown's appearance before the [Commons’ Liaison Committee of senior MPs] committee came as the head of the civil service, Cabinet Secretary Sir Gus O'Donnell, warned in an interview with the Times about future public spending levels.
Asked whether he agreed with a Canadian policy which saw spending cut by 20% - and some departments being harder hit than others - he said: "You could envisage a situation where you go for deeper dives on this, most certainly."
The business secretary Lord Mandelson and Chancellor Alistair Darling have both said public spending would be tighter than in the past.
Shadow chancellor George Osborne said: "Gordon Brown's dishonesty is becoming an embarrassment for the whole government.
"His claim that cuts can be avoided is now openly challenged by the cabinet secretary and the chancellor."
He added: "When the country needs a strong, united government to deal with the debt crisis, we have instead a divided cabinet and a prime minister who is no longer listening to his senior civil servants."
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