IMF warns UK on deficit reduction plans

Britain's next government will not be able to balance its books by the end of the decade, the International Monetary Fund has concluded in a blow to the rival political parties competing with ambitious spending pledges ahead of next month's election.

The organisation predicts that tax revenues will fall short of the Office for Budget Responsibility's expectations and whoever wins the general election on May 7 will be forced to spend more than currently planned, leaving the books in the red.

The assessment from Washington in the fund's twice-yearly Fiscal Monitor highlights the difficulty of eliminating the £90bn deficit at a time of moderate growth and significant pressures on public spending.

The warning comes as all political parties have suggested they will not raise taxes except for specific projects, are able to spend more on the National Health Service and childcare and will reduce the deficit significantly.

It highlights the risks to deficit reduction from economic uncertainty as well as the uncosted promises by politicians highlighted by the Institute for Fiscal Studies on Tuesday.

The IMF's caution on the difficulty of deficit reduction is a particular problem for the Conservatives, who committed in the manifesto this week that by 2018-19 the deficit would "move into surplus [in 2018-19], with the government taking in more than it is spending for the first time in 18 years". The fund's forecasts for the UK cast doubt on the Tories meeting this pledge and predicted problems for whichever party, or combination of parties, forms the next government.

Despite saying the UK economy is "solid" with "continued steady growth expected", it anticipates a worse economic performance than the OBR, weaker revenues and the need for higher public spending, all contributing to the budget remaining in the red by 2020.

In its forecasts, instead of the deficit moving from £90bn (5 per cent of national income) in 2014-15 to a surplus of £7bn in 2019-20 (0.3 per cent of GDP), it projects a deficit of £7bn in 2019-20, some £14bn worse than George Osborne's Budget forecasts, representing a shortfall of 0.6 per cent of GDP.

Although the IMF expects faster growth in 2015 than the OBR's forecasts, it thinks the medium-term ability of the British economy to expand is worse than the UK's fiscal watchdog believes. The fund expects the growth rate to settle at 2.1 per cent a year, while the OBR believes the economy can sustainably expand at an annual rate of 2.3 per cent, rising to 2.5 per cent by the end of the decade.

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In the IMF's Fiscal Monitor, the fund staff write that they based their budgetary forecasts on the OBR's most recent numbers but adjust the forecasts for "differences between IMF staff forecasts of macroeconomic variables and the forecasts of these variables assumed in the authorities' fiscal projections".

The IMF added that it thought the government's assumptions for public spending cuts in 2016 were unlikely to be achieved. "Given uncertainties pertaining to the May elections, a slightly slower pace of consolidation than that in the Budget is assumed for 2016-17 and beyond," the IMF commented.

It noted that although it did not think the government's current plans for savage spending cuts in 2016-17 and 2017-18 would be achieved, its forecasts for the public finances would still adhere to the legal rules in the Charter for Budget Responsibility, which commits the next government to eliminate the current budget deficit excluding investment spending within three years.

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