Front Matter

Front Matter Page

© 2010 International Monetary Fund

November 2010

IMF Country Report No. 10/338

United Kingdom: 2010 Article IV Consultation—Staff Report; Staff Supplement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for the United Kingdom.

The following documents have been released and are included in this package:

  • The Staff Report for 2010 Article IV Consultation prepared by a staff team of the IMF, following discussions that ended on September 27, 2010, 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 October 21, 2010. 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 supplement of November 2, 2010 updating information on recent economic developments.

  • A Public Information Notice (PIN) summarizing the views of the Executive Board as expressed during its November 8, 2010, discussion of the staff report on issues related to the Article IV consultation.

  • A statement by the Executive Director for the United Kingdom.

The documents 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.

Copies of this report are available to the public from

International Monetary Fund • Publication Services

700 19th Street, N.W. • Washington, D.C. 20431

Telephone: (202) 623-7430 • Telefax: (202) 623-7201

E-mail: publications@imf.org Internet: http://www.imf.org

International Monetary Fund

Washington, D.C.

Front Matter Page

INTERNATIONAL MONETARY FUND

UNITED KINGDOM

Staff Report for 2010 Article IV Consultation

Prepared by Staff Representatives for the 2010 Consultation with the United Kingdom

Approved by Ajai Chopra and Tamim Bayoumi

October 21, 2010

Overview: The UK economy is on the mend. Economic recovery is underway, unemployment has stabilized, and financial sector health has improved. The challenge now is to support a balanced and sustainable recovery. The government’s forceful multi-year fiscal deficit reduction plan will promote such rebalancing and is essential to ensure debt sustainability, thereby greatly reducing the risk of a costly loss of confidence in public finances. Fiscal tightening will dampen but not stop growth as other sectors of the economy emerge as drivers of recovery, supported by continued monetary stimulus. Upside and downside risks around this central scenario of rebalancing with moderate growth and gradually falling inflation are symmetric. Monetary policy will need to be nimble if risks materialize, and fiscal automatic stabilizers should operate freely. Meanwhile, the UK authorities should continue to provide leadership and build support for ambitious global reform of financial regulation. Ensuring a smooth transition to a new supervisory architecture at home will also be important to secure a safer post-crisis environment.

The 2010 Article IV discussions were held in London during September 15–27, 2010. The team comprised Mr. Chopra (head), Messrs. Fletcher, Meier, and Takizawa, Ms. Barkbu (all EUR), Ms. Le Leslé (MCM), and Mr. Moore (MCM). Ms. Ruiz Arranz (EUR) contributed to the mission’s work from headquarters.

The mission met with Chancellor Osborne, Bank of England Governor King, Financial Services Authority Chairman Turner, and other senior officials, academics, think tanks, and private sector representatives. Mr. Gibbs (Executive Director) and Ms. Fisher (Advisor, OED) joined selected meetings.

The mission’s concluding statement was published on September 27, 2010 and can be found at: http://www.imf.org/external/np/ms/2010/092710.htm

Past surveillance: During the 2009 Article IV Consultation, Directors commended the authorities’ response to the financial crisis, but highlighted the significant vulnerabilities related to sharply rising public debt and continued financial sector fragility. The authorities’ June 2010 budget lays out a concrete multi-year plan to reverse the deterioration of the public finances and put debt on a firmly downward path, as recommended by Directors. Supporting this process, the creation of the Office for Budget Responsibility (OBR) also matches past IMF advice calling for independent provision of budget assumptions. The health of the financial system has improved over the last year, though further progress is necessary in this area.

Contents

  • I. The Economic Agenda

  • II. Progress in Rebalancing and Deleveraging

    • A. Sectoral Adjustments and Evolution of Financial Balances

    • B. Deleveraging and Macro-Financial Links

  • III. Prospects, Risks, and Spillovers

  • IV. Ensuring Fiscal Sustainability

  • V. Maintaining Monetary Stimulus

  • VI. Strengthening the Financial System

    • A. Financial Sector Soundness and Public Support

    • B. Regulatory Reform

    • C. Moving to a New Regulatory Architecture

  • VII. Staff Appraisal

  • Figures

  • 1. Real Sector Developments

  • 2. Behavior of Key Macro Variables Around Recession Times

  • 3. Financial Position of Households

  • 4. Labor Market Developments

  • 5. Residential Housing Markets

  • 6. Fiscal Developments

  • 7. External Sector Developments

  • 8. Banking Sector Indicators

  • 9. Credit Market Developments

  • 10. External Claims of Consolidated UK-Owned MFIs

  • 11. Indicators of Capacity Utilization

  • 12. Price Developments

  • Tables

  • 1. Selected Economic and Social Indicators, 2005–11

  • 2. Public Sector Operations, 2008/09–15/15

  • 3. Balance of Payments, 2003–15

  • 4. Net Investment Position, 2003–09

  • 5. Medium-Term Scenario, 2004–15

  • Boxes

  • 1. Inward Spillovers to the UK

  • 2. To Tighten, or Not to Tighten—UK Fiscal Policy in the Public Debate

  • 3. Effectiveness of the Bank of England’s Quantitative Easing

  • 4. Accounting for Recent UK Inflation Dynamics

  • Annexes

  • A. Public Sector Debt Sustainability

  • B. Background Work

Front Matter Page

INTERNATIONAL MONETARY FUND

UNITED KINGDOM

Staff Report for the 2010 Article IV Consultation—Informational Annex

Prepared by Staff Representatives for the 2010 Consultation with the United Kingdom

(In consultation with other departments)

October 21, 2010

Contents

I. Fund Relations

II. Statistical Issues

Front Matter Page

INTERNATIONAL MONETARY FUND

UNITED KINGDOM

Prepared by the European Department

Staff Report for the 2010 Article IV Consultation—Supplementary Information

(In consultation with other departments)

Approved by Ajai Chopra and Tamim Bayoumi

November 2, 2010

This supplement provides an update on key economic and policy developments that occurred after the staff report was finalized. These developments do not affect the thrust of the staff appraisal. Indeed, several of the announced policies in the recently released Spending Review go in the direction recommended by staff (see paragraphs 25 and 47 in the staff report).

Front Matter Page

Public Information Notice (PIN) No. 10/147

FOR IMMEDIATE RELEASE

November 9, 2010

International Monetary Fund

700 19th Street, NW

Washington, D. C. 20431 USA

On November 8, 2010 the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the United Kingdom.1

Front Matter Page

November 8, 2010

United Kingdom: 2010 Article IV Consultation: Staff Report; Staff Supplement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for the United Kingdom.
Author: International Monetary Fund