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© 2001 International Monetary Fund
February 2001
IMF Staff Country Report No. 01/42
United Kingdom: 2000 Article IV Consultation—Staff Report; Staff Statement; Public Information Notice on the Executive Board Discussion; and Statement by the Authorities of the United Kingdom
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of the 2000 Article IV consultation with the United Kingdom, the following documents have been released and are included in this package:
the staff report for the 2000 Article IV consultation, prepared by a staff team of the IMF, following discussions that ended on November 20, 2000, with the officials of the United Kingdom on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on February 2, 2001. The views expressed in the staff report are those of the staff team and do not necessarily reflect the views of the Executive Board of the IMF.
a staff statement issued of February 23, 2001, updating information on recent economic developments.
the Public Information Notice (PIN), which summarizes the views of the Executive Board as expressed during its February 23, 2001, discussion of the staff report that concluded the Article IV consultation.
a statement by the authorities of the United Kingdom.
The document listed below will be separately released.
Selected Issues paper
The policy of publication of staff reports and other documents by the IMF allows for the deletion of market-sensitive information.
To assist the IMF in evaluating the publication policy, reader comments are invited and may be sent by e-mail to Publicationpolicy@imf.org.
Copies of this report are available to the public from
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INTERNATIONAL MONETARY FUND
UNITED KINGDOM
Staff Report for the 2000 Article IV Consultation
Prepared by Staff Representatives for the 2000 Consultation with the United Kingdom
Approved by Jacques R. Artus and Leslie Lipschitz
February 2, 2001
The Article IV consultation discussions took place in London during November 9–20, 2000.
The mission met with the Chancellor of the Exchequer, the Governor of the Bank of England, and other senior government officials, including members of the Monetary Policy Committee and officials of the Financial Services Authority. Staff also met with private sector groups including representatives of the Trade Union Congress, the Confederation of British Industries, private think tanks, retail and investment banks, and venture capital groups.
The mission comprised Mr. Artus (head), Ms. Coorey, Mr. Escolano, Ms. Kodres. Mr. Ubide (all EU1) and Mr. Prasad (RES). Mr. Pickford, Executive Director for the United Kingdom participated in the discussions.
The United Kingdom has accepted the obligations of Article VIII, Sections 2, 3, and 4. The exchange system is free of restrictions on the making of payments and transfers for current international transactions (Appendix II).
The United Kingdom has subscribed to the Special Data Dissemination Standard (SDDS) (Appendix III).
The authorities released the mission’s concluding statement and have agreed to the publication of the staff report.
Contents
Executive Summary
I. Introduction
II. Setting for the Discussions
A. Economic Background
B. Policy Developments
III. Policy Discussions
A. The Economic Conjuncture and Short-Term Policy Issues
B. Medium-Term Issues
IV. Staff Appraisal
Text Boxes
1. Potential Output and the NAIRU
2. What’s So Special About This Cyclical Expansion? A New Perspective from Labor Market Data
3. Strong Sterling and U.K. Competitiveness
4. So Where is the “New Economy” in the United Kingdom?
5. Financial Sector Risks and Vulnerabilities
Tables
1. Selected Economic Indicators
2. Public Sector Budgetary Projections
3. Contributions to Growth
4. Medium-Term Scenario
5. Indicators of External and Financial Vulnerability
Figures
1 Productivity—Output per Worker
2. Exchange Rates and Competitiveness Indicators
3. Cross-country Productivity Comparisons, 1999
4. Expenditure Contributions to Quarterly Growth of GDP
5. Asset Prices and Confidence Indicators
6. Labor Market Indicators
7. Price Developments
8. Public Sector Budget Forecasts and Outturns
9. Interest Rates
10. Three-Month Actual and Implied Forward Interest Rates
Annex I: Simulating the Effects of the Fiscal Expansion
Appendices
I. Basic Data
II. Fund Relations
III. Statistical Information
Executive Summary
Background: The United Kingdom is experiencing the longest period of sustained noninflationary output growth in more than 30 years, partly owing to strengthened macroeconomic and structural policies underpinned by improved monetary and fiscal policy frameworks. The productivity performance of the United Kingdom economy, however, has been weak. Output grew briskly in 2000 with private consumption being the main driving force. Net exports continued to exert a substantial drag on growth due to a loss of external competitiveness. Unemployment fell further and earnings growth decelerated through the year while inflation remained subdued. The 1999/00 budget closed with a substantial overperformance, but budget policies envisage sizable spending increases. The Bank of England has kept policy rates unchanged at 6 percent since February 2000.
Short-term policy issues: The discussions focused on whether the ongoing fiscal expansion risked accentuating overvaluation and overheating pressures. While the risks to the outlook appeared balanced at the time, downside risks from a sharper U.S. slowdown have increased since then. The staff noted that the planned expansion in public spending, while sustainable, posed short-term risks. Staff argued that the 2001 budget refrain from substantial new spending commitments or tax cuts beyond those already announced. The authorities, however, did not consider their budgetary plans expansionary as they aimed to correct past fiscal overperformance and return the fiscal balances to the previously announced path, consistent with the fiscal rules. On monetary policy, staff agrees there has been no pressing need thus far to cut the policy rate. However, the authorities will need to stand ready to cut rates if wage moderation persists and downside risks, particularly from a deteriorating external outlook, materialize.
Medium-term policy issues: The authorities’ medium-term fiscal strategy seeks to increase public spending on priority areas while maintaining a sound budgetary position. Staff broadly agreed with this strategy but suggested that there was, on the margin, scope to enhance the public sector contribution to national savings and investment by using the likely future revenue overperformance to run a broadly balanced budget over the cycle. Staff noted that this would not imply a change in the current three-year Departmental Expenditure Limits, only that no significant new (i.e., previously unannounced) budget initiatives be introduced that would whittle down each year’s overperformance. The authorities noted that their budget projections were deliberately cautious, but were skeptical of some of the staff’s arguments.
An analysis of the United Kingdom’s New Economy suggests sizable information and communications technology (ICT) investment and productivity gains in the ICT sector, but very low productivity growth in the rest of the economy. The authorities’ policies to promote innovation, R&D, competition, and entrepreneurship will contribute to raising productivity. Staff noted that strengthening the education system and improving skill levels were also clear priorities. Progress had been made with regard to pension reform, but some caution may be needed on any further public pension commitments. The banking sector continued to show strong profitability and capitalization, but the authorities remained vigilant of possible vulnerabilities in the current riskier environment, particularly regarding exposures to the telecommunications sector and the increased indebtedness of households and corporations.
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February 23, 2001
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Public Information Notice (PIN) No. 01/15
FOR IMMEDIATE RELEASE
February 28, 2001
International Monetary Fund
700 19th Street, NW
Washington, D. C. 20431 USA
Telephone 202-623-7100
Fax 202-623-6772
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February 23, 2001
