## United Kingdom: Staff Concluding Statement of the 2017 Article IV Mission _IMF News, December 20, 2017_ ## Source details **Canonical URL:** [United Kingdom: Staff Concluding Statement of the 2017 Article IV Mission](https://www.imf.org/en/news/articles/2017/12/19/mcs122017-united-kingdom-staff-concluding-statement-of-the-2017-article-iv-mission) ## Other formats - [Markdown version](/en/news/articles/2017/12/19/mcs122017-united-kingdom-staff-concluding-statement-of-the-2017-article-iv-mission/index.md) - [Structured JSON version](/en/news/articles/2017/12/19/mcs122017-united-kingdom-staff-concluding-statement-of-the-2017-article-iv-mission/index.json) - [Bundle manifest](/en/news/articles/2017/12/19/mcs122017-united-kingdom-staff-concluding-statement-of-the-2017-article-iv-mission/bundle-manifest.json) ## Bibliographic details - Published: December 20, 2017 --- ### Macroeconomic outlook and risks - Recent performance and drivers - Output is expected to grow by 1.6 percent this year, broadly in line with the IMF staff estimate of the economy’s potential. - Growth in the first three quarters of 2017 was slower than a year ago. - Employment rate has remained around record highs. - Sharp depreciation of sterling following the referendum pushed up consumer price inflation, squeezing household real income and consumption. - Business investment growth has been lower than would be expected given strong global growth and high capacity utilization. - Softening domestic demand was partially offset by a rise in goods exports, supported by strong growth in trading partners and weaker sterling. - Near-term projection - Growth is projected to remain around 1½ percent next year. - Inflation is expected to fall gradually but stay above target, implying further pressure on real wages and private consumption. - Projections assume continued progress in Brexit negotiations, culminating in understandings on a broad free trade agreement and on the transition process. - Key risks to the baseline - Brexit negotiation outcomes: faster-than-expected progress could buoy confidence; a breakdown could lead to a disorderly exit and sharp falls in asset prices. - Compressed risk premia and a decline in liquidity in the UK corporate bond market. - Still-high valuations of commercial real estate and, to a lesser extent, housing. - Low household saving rate. - Large current account deficit magnifies vulnerability to shifts in investor expectations. - Structural and long-term considerations - Brexit could reshape the structure of the UK economy; impact depends on the nature of the final agreement and may take many years to materialize. - The financial sector represents about 7 percent of GDP, accounts for around 10 percent of tax revenues and 14 percent of exports; it may be particularly affected absent an agreement preserving EU-facing financial services provision from the UK. - Manufacturing firms with complex international supply chains, such as in the automobile industry, could face significant challenges. - Productivity growth is the primary determinant of long-run living standards: - Since the financial crisis, output growth has been underpinned by strong employment increases, while productivity growth has been extremely weak. - Under the baseline assumption that labor productivity growth doubles to 1 percent from the ½ percent annual average since the financial crisis, potential growth will be only about 1½ percent per year in the medium run. - Higher barriers to cross-border flows of services, goods and workers would have more negative impacts on productivity. ### Monetary and fiscal policies - Monetary policy actions and guidance - The Bank of England eased policy following the Brexit Referendum: Bank Rate was cut by 25 basis points, another round of quantitative easing was initiated, and the Term Funding Scheme (TFS) was introduced. - TFS has supported lending to the private sector according to banks. - Since then, inflation has risen above 3 percent, mostly reflecting exchange rate pass-through. - The Monetary Policy Committee (MPC) voted at its November meeting to raise Bank Rate by 25 basis points, reversing the earlier cut. - Withdrawal of monetary stimulus should continue at a gradual pace, in line with the MPC’s policy guidance. - Scaling down of the Bank of England’s balance sheet should await the return of Bank Rate to a level from which it could be cut materially in the event of a demand slowdown. - Transparent and timely communication remains critical to guide market expectations. - Fiscal policy stance and recommendations - Continued deficit reduction is critical to rebuild fiscal buffers. - Public debt ratio stands at 87 percent of GDP. - All three main credit rating agencies downgraded the UK’s sovereign debt rating since the referendum. - The fiscal framework aims to reduce the deficit (after accounting for the impact of the economic cycle) to below 2 percent of GDP by 2020/21, and to balance the budget by the middle of the next decade. - Recent smoothing of the annual profile of deficit reduction accommodates higher public investment while continuing progress toward framework objectives. - Automatic stabilizers should be allowed to operate freely in response to demand shocks. - Long-term fiscal pressures - Population aging will put pressure on public finances; OBR projects annual spending on healthcare, long-term care and pensions is projected to increase by 1 percent of GDP between 2020 and 2025, and by much more thereafter. - Each 1 percentage point decline in GDP is estimated to decrease net revenues by about 0.4 percent of GDP. - Movement of a meaningful share of the financial sector outside the UK could reduce available revenues faster. - Losses associated with a 1 percentage point decline in long-run output would more than offset gains from any net savings from lower contributions to the EU budget post-Brexit. - Tax and spending policy recommendations - Greater reliance on revenue measures for consolidation may be warranted; deficit reduction since the financial crisis has relied mostly on spending measures. - Tax reforms suggested: - Scale back preferential VAT rates for certain goods to increase tax neutrality. - Better align the tax treatment of employees and the self-employed to improve fairness. - Adopt a tax allowance for corporate equity to reduce the tax code’s bias toward debt. - Rebalance property taxation away from transactions and toward values to boost mobility and efficient use of housing stock. - Spending-side recommendation: remove the triple lock on pensions to help contain rising demographic spending over the long term. - Fiscal transparency - OBR released its first Fiscal Risk Report assessing vulnerabilities of public finances. - Authorities have improved oversight for contingent liabilities and will respond more fully by next summer. - First-of-its-kind fiscal stress test shows public finances can deteriorate quickly under confluence of negative shocks. - From Autumn 2017 budget, major tax and spending decisions unified into a single fiscal event earlier in the financial year to allow more scrutiny and certainty. ### Financial sector policies - Banking system resilience - UK banks’ capital, leverage, and liquidity positions are well above international regulatory minima. - Bank of England stress tests indicate major UK banks are sufficiently well-capitalized to withstand simultaneous UK and global recessions, large falls in asset prices, and stressed misconduct costs. - Major bank resolution reforms are being implemented, including ring-fencing, total loss-absorbing capacity and resolution planning requirements. - Emerging risks and supervisory actions - Consumer credit has grown rapidly over the last two years; increasing competition has compressed spreads on mortgage and consumer loans. - Consumer credit developments need close monitoring; further action may be necessary if high growth persists, including enhanced oversight of nonbank financial institutions. - Recent increase in the countercyclical capital buffer was appropriate; its level should be kept under review. - Adopting the Basel III finalization agreement would help reduce excess variability in risk weights across banks using internal models. - Supervisors should continue scrutinizing banks’ risk weights and adjust PRA capital buffers where necessary. - Consider conducting a system-wide liquidity stress test of the major UK banks in a future biennial exploratory scenario. - Brexit-related financial sector challenges - Stress tests suggest major UK banks are sufficiently well-capitalized to withstand a disorderly Brexit, but even an orderly Brexit could imply significant sectoral changes. - Prudential regulators and supervisors have taken a proactive approach to help firms prepare for exit from the EU. - Authorities are translating EU financial regulations into UK law and replicating EU institutional capacity where necessary. - Some areas (continuity of long-dated cross-border insurance and derivatives contracts, transfer of personal information across borders) are best achieved through coordinated EU and UK legislation; early agreement and a sufficiently long transition period would reduce uncertainty. - Close cross-border regulatory and supervisory cooperation remains essential, especially regarding euro-denominated derivatives clearing on UK-based central counterparties and permissions for EU banks. ### Contingency planning (tail risk scenario) - Policy stance under a disorderly Brexit - Policies should be geared toward supporting macroeconomic and financial stability. - Bank of England should ensure adequate financial system liquidity and maintain swap lines with other major central banks if adverse market reactions occur. - Monetary policy implications depend on relative shifts of supply, demand and the exchange rate. - Fiscal framework flexibility could be used to provide support, but easing should be temporary, limited and anchored by credible medium-term fiscal consolidation plans. - A permanent shock to output would require an eventual adjustment of revenues or spending. ### Structural reforms - Productivity-enhancing measures - Public infrastructure investment has increased; budget envisages further capital spending increases over the medium term, including through the National Productivity Investment Fund. - National Infrastructure Commission will release its first National Infrastructure Assessment next year. - Human capital measures: T-level qualifications and the apprenticeship levy aim to raise job-specific skills, promote higher level technical skills and reduce regional disparities. - Monitor and evaluate effectiveness of these programs once established. - Housing supply measures announced, but continued efforts needed: ease planning restrictions and reform property taxes to address chronic shortages preventing worker relocation. - Regional productivity differences - UK has some of the highest and some of the lowest productivity regions among advanced economies. - No single solution: successful regions need to address congestion and housing restrictions; other regions should increase human capital and improve transport connectivity. - Greater local decision-making could better tailor policies to local conditions, including technical training eligibility and curricula. - Transparency and anti-money laundering - 2017 Money Laundering Regulations and the Criminal Finances Act adopted; second National Risk Assessment of money laundering and terrorist financing completed. - Establishment of central registers for companies and trusts is positive; mechanisms to verify ownership information should be strengthened. - Improve AML/CFT supervision of trust and company service providers (including lawyers and accountants) to ensure accurate ownership information accessible by tax and law enforcement authorities. - Continued engagement with Crown Dependencies and Overseas Territories on exchange of information on companies and trusts is critical. *International Monetary Fund, Staff Concluding Statement of the 2017 Article IV Mission for the United Kingdom* --- ## References - [2017 UK Article IV Press Conference: Opening Remarks by IMF Managing Director Christine Lagarde](https://www.imf.org/en/news/articles/2017/12/20/sp122017-2017-uk-article-iv-press-conference-opening-remarks-by-managing-director) - [United Kingdom and the IMF](http://www.imf.org/external/country/GBR/index.htm) - [IMF Policy Advice -- A Factsheet](https://www.imf.org/en/about/factsheets/imf-surveillance) - [The IMF and the Fight Against Money Laundering and the Financing of Terrorism](https://www.imf.org/en/about/factsheets/sheets/2023/fight-against-money-laundering-and-terrorism-financing) - [Mission Concluding Statements](https://www.imf.org/en/news/searchnews) - [PRESS CENTER](http://presscenter.imf.org/) - [https://www.imf.org/en/home](https://www.imf.org/en/home) _Source: https://www.imf.org/en/news/articles/2017/12/19/mcs122017-united-kingdom-staff-concluding-statement-of-the-2017-article-iv-mission_