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© 2005 International Monetary Fund
March 2005
IMF Country Report No. 05/80
United Kingdom: 2004 Article IV Consultation—Staff Report; Staff Statement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for 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 2004 Article IV consultation with the United Kingdom, the following documents have been released and are included in this package:
the staff report for the 2004 Article IV consultation, prepared by a staff team of the IMF, following discussions that ended on December 20, 2004, 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 8, 2005. 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 of March 2, 2005 updating information on recent developments.
a Public Information Notice (PIN) summarizing the views of the Executive Board as expressed during its March 2, 2005 discussion of the staff report that concluded the Article IV consultation.
a statement by the Executive Director for the United Kingdom.
The document listed below have been or will be separately released.
Selected Issues Paper
The policy of publication of staff reports and other documents 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
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INTERNATIONAL MONETARY FUND
UNITED KINGDOM
Staff Report for the 2004 Article IV Consultation
Prepared by the Staff Representatives for the 2004 Consultation with the United Kingdom
Approved by Michael Deppler and Juha KÓ“hkÓ§nen
February 8, 2005
Article IV consultation discussions were held during December 8–20, 2004. The staff team, which comprised Ms. Schadler (head), Mr. Morsink, Mr. Hunt, Ms. Honjo, Mr. Schule, and Ms. Koeva (all EUR), met with the Chancellor of the Exchequer, the Governor of the Bank of England (BOE), the Chairman of the Financial Services Authority (FSA), and other senior government officials, as well as representatives from financial institutions, research institutes, and labor and business organizations. Mr. Scholar and Mr. Gregory (OED) attended most meetings.
The Labour Government enjoys a large majority in Parliament. General elections are expected this spring.
In concluding the last Article IV consultation on March 3, 2004, Directors commended the strong performance of the U.K. economy, agreed that monetary policy should continue to tighten to facilitate a soft landing scenario, and concurred that the fiscal deficit needs to be reduced, with many Directors recommending that new fiscal measures be adopted. For further details, see www.imf.org/external/np/sec/pn/2004/pn0415.htm.
The United Kingdom has accepted the obligations of Article VIII, Sections 2, 3, and 4. The exchange system is free of restrictions on payments and transfers for current international transactions (Appendix II). The United Kingdom has subscribed to the Special Data Dissemination Standard, and data provision is adequate for surveillance (Appendix III).
The authorities released the mission’s concluding statement and have agreed to the publication of the staff report.
Contents
Executive Summary
I. Background
II. Report on the Discussions
A. Economic Outlook
B. Monetary Policy
C. Fiscal Policy
D. Structural Issues
E. Financial Sector Stability
F. Other Issues
III. Staff Appraisal
Tables
1. Selected Economic and Social Indicators
2. Quarterly Growth Rates
3. Medium-Term Scenario
4. Balance of Payments
5. Public Sector Budgetary Projections
Text Boxes
1. Policy Recommendations and Implementation
2. Why Has Inflation Been Low?
3. Policy Response to a Sharp Decline in House Prices
4. Public Sector Agreements—Are They A Magic Bullet?
5. The Golden Rule—How Much Safety Margin Does It Need?
6. Property Taxation—Need for Reform?
Appendices
1. Basic Data
2. Fund Relations
3. Statistical Information
Executive Summary
Background
Macroeconomic performance over the past decade has been strong and steady, owing much to structural reforms and improvements in policies and policy frameworks. Over the past year, growth moderated, reflecting in part the tightening of monetary policy, and appears to be settling at potential. Wage growth stabilized and inflation remained subdued. The fiscal deficit, which deteriorated sharply between 2000 and 2003, stayed at about 3 percent of GDP. House price appreciation slowed, but house prices are widely seen as overvalued.
Key policy issues
Outlook: Most interlocutors agreed that the economy was operating in the vicinity of full capacity and that growth would remain at about 2½ percent. However, the Treasury saw a still-sizable output gap and expected quarterly growth to increase, supported by stronger external demand and government spending. Views differed on the economic impact of a possible decline in house prices. Another risk was a disorderly resolution of global imbalances. The widening trade deficit and higher oil prices were not seen as major concerns.
Monetary policy: The BOE and staff thought that monetary policy had been appropriate over the past several years. With the policy interest rate now in the neighborhood of the neutral rate and given the important uncertainties to the outlook, the next move in interest rates could be up or down. Monetary policy was well-positioned to respond to shocks. Staff welcomed the increased emphasis on inflation projections based on market expectations of future interest rates and the extension of the projection horizon from two to three years. Staff suggested that the BOE publish numerical projections for a broader range of key variables.
Fiscal policy: The Treasury expected that slower spending growth and a rebound in revenues would reverse the past fiscal deterioration and ensure that the fiscal rules were respected. While accepting the direction of future changes in spending and revenue growth, staff were less sanguine about the strength of structural revenues and the buoyancy of financial sector taxes over the medium term. Therefore, staff called for an early start to smooth fiscal adjustment, amounting to about 1 percent of GDP over the next five years. Staff also recommended further enhancing the transparency and credibility of the fiscal projections.
Structural issues: The Interim Report of the Pensions Commission found that many people were not saving enough for retirement. While there was agreement on some aspects of the solution to this problem, views differed widely on the appropriate role of government in ensuring adequate private saving. Staff welcomed the narrowing of the U.K.’s productivity gap and encouraged the systematic evaluation of government initiatives to boost productivity. Staff urged the implementation of recommendations to reduce house price volatility.
Financial sector stability: Indicators of banking system soundness remained favorable and the health of the insurance sector improved over the past year. The BOE is planning to introduce a voluntary reserve system, which will reduce volatility in overnight money markets and lower intraday credit exposures in the payments system. The AML/CFT regime was strengthened, and the authorities are stepping up their oversight to ensure compliance.
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March 2, 2005
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March 2, 2005
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Public Information Notice (PIN) No. 05/27
FOR IMMEDIATE RELEASE
March 8, 2005
International Monetary Fund
700 19th Street, NW
Washington, D. C. 20431 USA
On March 2, 2005, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the United Kingdom.1
