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© 2006 International Monetary Fund
March 2006
IMF Country Report No. 06/86
United Kingdom: 2005 Article IV Consultation—Staff Report; 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 2006 Article IV consultation with United Kingdom, the following documents have been released and are included in this package:
the staff report for the 2005 Article IV consultation, prepared by a staff team of the IMF, following discussions that ended on December 19, 2005, 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 15, 2006. 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 Public Information Notice (PIN) summarizing the views of the Executive Board as expressed during its March 1, 2006 discussion of the staff report that concluded the Article IV consultation.
a statement by the Executive Director for United Kingdom.
The document listed below has 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 2005 Article IV Consultation
Prepared by the Staff Representatives for the 2005 Consultation with the United Kingdom
Approved by Michael Deppler and Juha Kähkönen
February 15, 2006
Article IV consultation discussions were held during December 8–19, 2005. The mission team, which comprised Ms. Schadler (head), Mr. Morsink, Mr. Hunt, Ms. Honjo, Ms. Iakova (all EUR), Ms. Ong (MFD), Mr. Botman (FAD), and Mr. Andersson (Swedish Riksbank), met with the Chancellor of the Exchequer, the Governor of the Bank of England, the Chief Executive Officer of the Financial Services Authority, and other senior government officials, as well as representatives from research institutes, labor and business organizations, and financial institutions. Mr. Scholar and Mr. Gregory (OED) attended most meetings.
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). Data provision is adequate for surveillance (Appendix III).
The Labour Government was re-elected to a third consecutive term in May 2005.
The authorities released the mission’s concluding statement and have agreed to the publication of the staff report.
Contents
Executive Summary
I. Overview
II. Background
III. Report on the Discussions
A. Introduction
B. Economic Outlook
C. Monetary Policy
D. Fiscal Policy
E. Financial Stability
F. Population Aging
G. Other Issues
IV. 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
Boxes
1. Fund Policy Recommendations and Implementation
2. Consumption and Housing Wealth
3. The Impact of Higher Energy Prices on Growth and Inflation.
4. Fiscal Adjustment—Timing and Composition
5. National Audit Office (NAO)
6. Financial Stability and the Credit Risk Transfer Market
Appendices
I. Basic Data
II. Fund Relations
III. Statistical Issues
IV. Sustainability Exercises
Executive Summary
Background
Macroeconomic performance over the past decade has been strong and steady, due in part to confidence-enhancing policy frameworks and generally sound implementation. However, in 2005, growth slowed and inflation rose, reflecting an abrupt deceleration of house price increases and a sharp increase in oil prices. While public debt is moderate, the fiscal deficit remained above 3 percent of GDP in FY2004/05. The financial system is generally healthy, although a substantial increase in the pricing of risk would pose risks. Evidence that a portion of the population is not saving enough for retirement is raising concerns about the political sustainability of the relatively frugal state pension system.
Key policy issues
Outlook: In 2006–07, growth is likely to pick up and CPI inflation to stabilize at the target. However, large uncertainties—particularly from house prices, energy prices and immigration—surround prospects for demand and supply. The current account deficit and the negative net international investment position are not major concerns. The Treasury sees the output gap as sizable but others—including staff—consider it to be modest.
Monetary policy: Staff agreed with the BOE’s response to slowing demand and rising inflation in 2005, including the ¼ percentage point interest rate cut in August. MPC members and staff generally considered the current policy stance to be appropriate, though some MPC members saw downside risks to the growth forecast. Staff advocated that policy rate decisions be focused in the very near term on averting second round effects of the energy price increase and—after the pay rounds in early 2006—on ensuring that the recovery of demand to trend growth is sustained.
Fiscal policy: The overall deficit is projected to narrow to 3 percent of GDP in FY2005/06, reflecting mainly higher revenues from energy production and the booming financial sector. The deficit is expected to narrow further over the medium term, due to expenditure restraint, a tax increase on North sea oil and gas producers, and revenue buoyancy as the output gap closes. On the basis on the same policy assumptions, the Treasury projects a deficit of 1½ percent of GDP in the medium term, while staff project 2 percent of GDP—still adequate to stabilize debt at about 40 percent of GDP. The main difference between the projections relates to the revenue gain from closing the output gap.
Financial stability: The banking system is well-capitalized and highly profitable. The health of the insurance sector has improved substantially. Credit risk transfer instruments are helping to diversify credit risk, but their rapid growth may also be creating new risks. Payment and settlement systems have been strengthened.
Pensions: The Pensions Commission has proposed reforms that would largely address the main obstacles to private saving for retirement identified last year. Treasury officials raised several questions, including about affordability, a concern shared by staff.
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March 1, 2006
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Public Information Notice (PIN) No. 05/24
FOR IMMEDIATE RELEASE
March 3, 2006
International Monetary Fund
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Washington, D. C. 20431 USA
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Fax 202-623-6772
