Transcript of the UK Article IV Mission Concluding Press Conference with David Lipton
UK CHANCELLOR GEORGE OSBORNE: Ladies and gentlemen, I want to welcome you all to the Treasury. Particularly I want to welcome David Lipton, the First Deputy Managing Director of the IMF, and his team here to conduct the annual Article IV assessment of the United Kingdom.
The IMF performs an important role in scrutinizing the economic policies of countries and providing external advice and challenge. And it is in recognition of the value that we place on that role that from the moment I became Chancellor I changed previous practice and offered the Treasury as the location for the IMF’s press conference that comes at the end of this Article IV process. And we happily host them again today.
David’s team have been here for two weeks. They’ve spoken to myself, to the Chief Secretary, to the Governor of the bank, and to many, many others. There’s been quite a lot of speculation about the IMF’s report, but as Christine Lagarde has said, Article IV is the place when we spend time discussing, debating, exploring, understanding, trying to go really under the skin of each economy. And the IMF’s in-depth analysis has shown policy remedies to restore growth and rebalance the economy are not straightforward.
There are no easy answers to problems built up in the UK over many years. It’s a hard road to recovery, but we’re making progress, and the news this week that inflation has fallen and borrowing continues to fall are the latest evidence of that. Of course, there is further to go and we have to go on confronting the difficult choices to help our economy to heal.
So I agree with the IMF that the best approach to this is a multipronged one. Our strategy is just that: monetary activism, a credible fiscal plan, and structural reform.
And on monetary activism, I welcome the IMF’s advice that we should continue a supported monetary policy, and the recently announced expansion of the funding for lending scheme to help small businesses is the latest example of that. On fiscal policy, the IMF are clear that our medium-term plan to reduce the deficit has earned credibility, a welcome expectability. And I agree that it is right to prioritize infrastructure investment where we can. That’s why we are investing more in capital than my predecessor had planned. That’s why I’ve added in the last two years to those plans, and that’s why it will be a focus of the spending round next month and that will be done within the credible fiscal plan we’ve set out.
On structural reform, the IMF are absolutely right to say that it is vital that we rebalance what has become an unbalanced economy. That’s what our reforms to education, welfare, and tax are designed to achieve.
And finally, on the financial sector, this is an area of fresh focus for the IMF and I welcome their attention to it. I know that David’s team has spent a lot of time looking at this. Here I agree with the IMF. Having refocused their business, now is the time for a clear strategy on how to return RBS and Lloyd’s to the private sector in a way that protects value for the taxpayer.
The Parliamentary Banking Commission I established is completing its work and we will then set out the way ahead. We need functioning banks supporting the real economy instead of nursing their wounds, and I’m determined we will deliver that.
Britain will not duck its economic challenges. We will not avoid the difficult choices we need to make to have a more balanced and sustainable economy that delivers prosperity for our country. The analysis and the scrutiny of the IMF will help us to do that.
Let me now turn over the press conference to David Lipton and his team. I’m interested in hearing what he has to say and then I will leave you to ask him questions. Thank you very much. David.
MR. LIPTON: I’m delighted to be here in London for the 2013 IMF Article IV Consultation. Thank you, Chancellor Osborne, for hosting our press conference here, and for all the hospitality that the Treasury has shown to our team during the two-week period.
The world’s now five years into the most severe financial crisis since the Great Depression. Few countries were affected by it as much as the United Kingdom, given its place at the center of the global financial system. Rising to the challenge, the government has undertaken sweeping reforms in a number of areas: labor market and tax reforms have been introduced to boost Britain’s competitiveness; financial sector reforms have been undertaken to put in place a vastly improved regulatory and supervisory architecture that will support the UK’s globally systemic banks, and which should generate long-term stability benefits, not just for the UK, but for the rest of the world as well.
The government also implemented strong fiscal consolidation, which has reduced fiscal risks and earned the government credibility. The Bank of England has sharply eased monetary policy to support growth and, together with the UK Treasury, introduced the innovative credit-easing measures, including the funding for lending scheme.
Despite all that, durable economic recovery has not yet taken hold. Recent data suggests some improvement in economic and financial conditions, and that’s encouraging, but economic recovery has a way to go. Investment has been persistently weak and unemployment, especially among young people, is high. Credit intermediation is not adequate as balance sheets are still impaired. And there’s also a risk that if output remains below the country’s productive capacity for an extended period of time, the economy may lose some of its capacity permanently.
So restoring growth momentum and rebalancing the economy is vital. Stronger growth is needed to restore incomes, ensure the sustainability of public debt, and restore banks to sound health.
The authorities have been working on the difficult of challenge of shaping policies to meet these goals. Building on that, the UK needs a multipronged strategy, including more forceful action in the areas of monetary, financial sector, fiscal, and structural policies.
That multipronged strategy is needed to address demand and supply constraints and to guide the economy to greater and more balanced growth. Specifically, monetary policy should remain accommodating and provide assistance to households and investors that rates will be kept low until recovery achieves full momentum.
But for monetary policy to be effective, support must be provided for other policies, in particular financial policies must be aimed at ensuring that balance sheet repair of major banks to remove supply side constraints on lending, notably to SMEs, goes forward.
For the two banks in which the government holds a substantial stake, a clear strategy is needed with a view to returning them to private ownership in a shape to resume lending activity. If a sovereign backstop is required to meet a capital shortfall in that context, that should be provided, as it would have a high multiplier in terms of economic growth.
All of that said, without investment in infrastructure and skills to boost the long-run productive and export potential of the economy, private sector expectations of future incomes will remain suppressed. This in turn will weigh upon consumption and investment demand. This is where both fiscal and structural policies can play an important role.
For instance, to offset the drag from fiscal tightening while staying within the medium-term framework, we suggest that the government bring forward planned capital spending, and consider measures such as reducing the effective marginal tax rate on investment and introducing tax allowances to raise equity, but those things would catalyze private investment. With sovereign yield at historic lows, the benefits from these measures in terms of economic growth will be substantial.
We recognize that higher fiscal support for the economy is not a straightforward choice as the deficit is still high. But the government’s credible medium-term consolidation plan, coupled with the UK’s strong institutions and long-duration debt, afford space to provide this support.
Finally, monetary and fiscal support for growth must be accompanied by structural reforms to ensure that growth is dynamic, balanced, and robust. Here we echo a number of recommendations of the LSE Growth Commission and the Heseltine review, notably to improve the economy’s skills and competitiveness and to accelerate the implementation of large infrastructure projects.
So that, in a nutshell, is our assessment for the economic outlook and our ideas about an appropriate multipronged policy response to the situation. I thank the authorities for this two weeks that we’ve had of constructive discussion. And before Chancellor Osborne heads off to tend to his other obligations let me say thank you to you for being here today and for hosting us.
So next, I’ll stop and be happy to entertain questions.
BRUNO SILVESTRE: Let’s open for questions. Please provide your name and the media you’re working for.
QUESTIONER: Regarding your advice on fiscal policy and bringing forward capital spending, can you say how much capital spending you think should be brought forward, when, and what effect it would have?
MR. LIPTON: Yeah, surely. Our view about the fiscal situation is that the measures, the discretionary measures that are planned for this year will likely impart a drag on the economy, and it would be desirable to try to offset that drag by bringing forward -- some combination of bringing forward infrastructure, spending, and providing some -- undertaking some tax measures, including the measures I mentioned earlier to provide a lower effective tax rate on corporations and to incentivize equity finance.
As far as infrastructure is concerned, we see a range of possibilities. The government has a roster of about 300 billion pounds of infrastructure projects that they’re looking at. And while these range in terms of how quickly they can be started up, we certainly see the possibility that in the first year at the front end that some infrastructure investments in improving social housing, repairing schools and other public facilities could be done relatively quickly. Clearly, some of the longer term infrastructure projects would take more time.
But the idea that we have is that up to the extent of the planned discretionary measures, accelerating infrastructure spending would provide a quite significant kick to the economy because the multiplier, the economic impact of infrastructure spending would likely be significantly positive, probably a multiplier of 1, possibly higher, and so offsetting the drag that comes from the planned discretionary measures would be possible.
QUESTIONER: Mr. Lipton, what is the danger if the UK does not adopt your recommendations?
MR. LIPTON: Well, I mean, right now, the economy is growing slowly, and it, as I think both I and the Chancellor said, the economy needs to be rebalanced. And so the peril of not acting is that resources remain unemployed. The unemployment rate remains high, and economists measure the output gap -- the difference between what the economy is presently producing, and what it might produce -- while it may diminish, it will remain significant.
We project that the output gap is a number that measures this slack in the economy, and while different institutions estimate it at various levels, I think our estimate of about a four percentage point output gap is typical, and we project that, on the present trajectory, that would only be halved by the end of the five-term medium-term framework. And that leaves the economy underemployed, resources idled, and, as I mentioned, the risk that the economy could lose some capacity permanently. People out of work become less employable. The absence of investment leaves you with a smaller stock of capital at the end of the five-year period. So, if one thinks of it in a five-year timeframe, there is the peril that the economy would just underperform for some time.
QUESTIONER: Just to be very clear about what you're recommending here -- are you saying that the U.K. government should slow its planned pace of fiscal consolidation this year, in order to support growth?
MR. LIPTON: Yeah, what we're saying is that, within the framework of its medium-term objectives, that it would be, in our view, useful for the economy for some infrastructure investment and other measures to be brought towards the present, in order to reduce the drag that is presently intended under the present framework in this year and in the coming years.
So, in essence, this would be to allow the adjustment to take place in a more back-loaded fashion, and provide more support for the economy at the front end of the period.
QUESTIONER: Just following onto that -- are you saying that the full 10 billion pounds worth of drag this year from the fiscal consolidation should be offset in this one year, or just part of it? And if so, how much of it?
MR. LIPTON: Well, we see room to offset the drag from the planned discretionary measures. Of course, I want to be clear: we're recommending a range of other policies besides fiscal policies that would also be supportive of the economy. Our view is that there is no single silver bullet. We are not suggesting that this adjustment in the path of fiscal consolidation would be enough to restore the economy to full utilization, but we do think it could play a useful and a helpful role for the economy, for workers, and for companies.
Now to determine exactly how much is feasible, one has to look through the infrastructure roster, and see what can be advanced. And our view is that what can be advanced should be advanced, up to removing the drag that is presently envisaged. But I think that's a job that requires more work, that technically requires more to be done.
And, I would add, I think that the private sector should play a role in this, too. They should step forward and say what infrastructure would benefit them -- where they would gain, and not only where they would gain, but where they could contribute, where they would produce more or invest more, if infrastructure projects are done, so that the selection and the execution of infrastructure projects can have the maximum impact on the economy.
QUESTIONER: Along the same theme, I guess the Chancellor could look at your list of proposed things to do -- including bringing forward of capital spending and things like cutting corporation tax rates -- and say that he's pretty much done all these things already, and all you're saying, "We like that, and we'd like you to do just a bit more of it, please; be even more flexible than you've already been."
MR. LIPTON: Well, I think that if we agree, we agree. But our position and, I think, our suggestions are that there are a range of policies in the fiscal, monetary, financial sector, and structural areas that would help support the economy. And I think in the fiscal area, this is, as I've said, largely the advancing of infrastructural projects. And if this can be done, I think it would be very useful.
QUESTIONER: In April, several of us went to Washington, and we've read the International Monetary Fund was saying that consideration should be given to greater near-term flexibility in the fiscal adjustment path.
And it doesn't sound like you're quite as explicit as that today. You're saying judgments about fiscal policy need to balance debt sustainability of growth concerns.
Are you saying that the U.K. should give consideration to more flexibility in a fiscal adjustment path? Should it go a bit slower with austerity?
MR. LIPTON: Well, what I've said is that, you know, in a range of policy areas the government should be more supportive of growth than it has been and that it plans to be, that one of the best payoff areas is infrastructure investment, because infrastructure investment does not hurt fiscal sustainability, because of its impact on the private sector, and direct impact on the economy, and that this effort should start now -- that there's a reason to begin now, where the government can, to augment infrastructure spending, to be more supportive, that all of the other policy areas reforms and steps should be undertaken as well, because there is no one area that's going to be, in and of itself, sufficient to restore the full employment of the economy.
So, our approach, I think, is specific. It is multipronged, but it is an agenda that we need to start now.
QUESTIONER: You suggest the Bank of England should provide assurances they've low rates, until the economy reaches full momentum and recovery. Should they quantify what a full momentum is?
MR. LIPTON: I think it's up to each central bank to figure out how it communicates with the market. I think our point is that communication of policy could have a bit more of a forward orientation, so that the consequences of the policies being undertaken would be somewhat more forceful. In essence, by committing to keep rates at suitability low levels until the economy is sufficiently strong -- that would be more supportive.
Now exactly how one -- there are different central banks that have different approaches to how you frame that kind of assurance, and I would leave it as a subject to be discussed.
I would add, however, that this is important, because we are seeing that monetary policy impact is diminishing over time -- not just here, but in all of the quantitative easing experiences around the world.
I think, though, that one issue that is important here -- that's a special issue for the U.K. -- is that the transmission of monetary policy is impaired by the weakness of banks, the fact, that bank repair has not gone far enough. We have a fairly concentrated banking system with a large fraction of assets remaining in the hands of a small number of banks, and as I said in my remarks, the two banks where the government has significant stakes are institutions where repair could be undertaken quickly. And that would probably help augment the potency of monetary policy.
So there's an interaction between the financial sector reform and the monetary policy steps.
QUESTIONER: You talk about the risk of house prices going up if help-to-buy isn't balanced with some incentives on developers to increase the supply of housing. How much would a rise in house prices of that nature concern you? And secondly, on the incentive, are we talking about a land tax here, or some other form of incentive?
MR. LIPTON: Well, the government has framed the help-to-buy policy, and I think when one looks at that policy or policies like it, one has to distinguish the demand effects and the supply effects. Clearly, policies that allow households to acquire mortgages at higher loans to value with less money down are going to augment demand and raise prices. Within bounds, that's suitable. Of course, in a country where housing prices have been elevated, and have now, for some years, been declining, calibrating exactly what is an acceptable augmentation is a tricky business.
And, more importantly, the question is whether housing sector policies also include steps that will augment supply. After all, it will be very important for the economy for there to be land that's undeveloped to be put into development, and not only to have policies that affect the demand side.
And so if there can be some reorientation of policies to provide incentives for land that's being held for capital appreciation to be developed, or to remove any disincentives that presently exist, that would help balance the housing sector policy, and try to encourage both demand and supply augmentation, which, in and of itself, would help moderate the extent to which the impact ends up being on adjusted prices.
QUESTIONER: It's certainly, I think, very fair to say, is it not, that the criticism of the pace of austerity here has lessened quite significantly from the Fund in the last month or two.
May I ask, is that because -- to quote someone else -- the facts have changed, or are there, perhaps, differing views within the IMF itself on pace here?
MR. LIPTON: I'm not going to comment on the calibration of our advice. I'll say a few things, though.
The economic situation -- the most recent data shows some uptick in activity. We acknowledge that, and I think that's a good sign, and we're pleased that that's taking place. But when we look at that, our view is that it's modest in size so far, and, as a result, our assessment is that the slack in the economy -- what I've called the output gap -- remains substantial, and is likely to remain substantial for some time on the present policy trajectory.
So we continue to see a reason for policy adjustment, and that's why we've scoped out this four-point multipronged strategy.
QUESTIONER: Do you think the economy would be in better health now if this investment in infrastructure, which you're now calling for, had taken place earlier?
MR. LIPTON: Let me say that going back to the beginning of this crisis, this was obviously a very severe crisis for the U.S., the U.K. and Europe. The U.K., as home to the largest financial center, started with a very severe situation and an unclear outlook -- an unclear -- you know, in the midst of the kind of financial panic we experienced, where there was a loss of confidence in financial institutions and in capital markets, I think it was appropriate for the U.K. to begin forcefully with both fiscal consolidation -- since deficits, at the time, were very high -- and banking sector repair, and financial and regulatory reform.
What we have seen over the subsequent years is the path that has turned out. And you can see that we at the IMF, as we've analyzed the situation, we've offered advice on analyzing the pace of consolidation and thinking through its impact on the economy. And that's led us to where we are today, and the suggestions that we've made.
So, you know, I think, certainly, a different ex-post -- a different path of adjustment might have -- in particular, advancing infrastructure planning some years ago might have led to infrastructure projects being at a stage where they could be implemented now. But without the benefit of hindsight, I think that would have been very hard to foresee.
What is important now is not to make a mistake today; presume that all will be well in the economy some years from now, get started -- I think it's important to get started on infrastructure projects that will support the economy, and boost both demand and supply, so that in the several years to come, that there's, in essence, insurance that there'll be suitable support for the economy and for growth.
QUESTIONER: Just a couple of very quick ones. first of all, can you be absolutely clear, this is a fiscally neutral plan over the medium term. What you've suggested here is fiscally neutral over the medium term. You're asking for something in stimulus, but there is going to be a take-back in future years.
And just secondly, on the banks and the question of a sovereign backstop -- can you just be clearer about precisely how that would work? You're saying that the government needs not to rule out putting money into RBS and Lloyd’s, if that's going to help them back into the private sector.
MR. LIPTON: Let me first say we've made a set of recommendations. The fiscal recommendation is one part of a multipart set of suggestions.
As for that part, the recommendation we've made today is, as you put it, fiscally neutral. We're suggesting that within the multiyear medium-term frame that the government has laid out, that it should advance infrastructure spending in order to provide more support for the economy.
But that said, I think that one of the lessons of the last several years -- and one of the lessons, not just from the U.K. experience, but from experiences in the rest of Europe, in the United States, and elsewhere -- is that one always has to evaluate the impact of policies on the economy as you go.
So what I mean to say is that whether the present medium-term frame turns out to be an appropriate one when viewed from the standpoint of next year or the year after remains to be seen. You can see in our advice, the advice we've given to other countries in Europe, that other countries have chosen to slow their medium-term adjustment plans, and we've supported them in that. And we tend to take a country-by-country, year-by-year approach to making such assessments.
On your second point, you know, we're not at the point of talking about a specific approach to dealing with the two banks that I made reference to. But, of course, when you are repairing the soundness of the banks, you have to deal with their asset problems and their capital needs. And all I'm saying is that if it turns out that -- whatever technique is used, that there is a capital need, it's important that capital be provided. And if that capital can come from private sector capitalization, that's fine, but if it can't, it's important that it be done, even if that requires public sector involvement.
Our assessment is that public sector recapitalization of these banks, given the important role that they play in the generation of credit to the economy, is surely desirable, provided that it's done in the context of a sound bank recapitalization plan.
Thank you all very much.