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IMF tells Britain to keep up COVID-19 spending, plan for tax rises

FILE PHOTO: IMF Managing Director Kristalina Georgieva speaks during a conference hosted by the Vatican on economic solidarity

By David Milliken and William Schomberg

LONDON (Reuters) - Britain can afford to ramp up its already massive spending push to counter the effects of the coronavirus pandemic on the economy, the head of the International Monetary Fund said on Thursday.

With finance minister Rishi Sunak facing alarm from within his Conservative Party about a record peacetime budget deficit, IMF managing director Kristalina Georgieva said he should increase public investment and bolster welfare support for people who lose their jobs because of the crisis.

The government should also continue supporting companies and protecting workers until the economic hit eases, Georgieva said at the end of a review of Britain's economy by the Fund.

"My main message today is that continued policy support is essential to address the pandemic and to sustain and invigorate a recovery," Georgieva said.

Low interest rates meant Britain could afford to borrow heavily to limit the economic and social impact of the crisis, but in the longer term tax rises would be needed, she added.

The IMF has estimated that Britain is on course to rack up a budget deficit of 16.5% of gross domestic product this year, dwarfing the hit from the global financial crisis.

Georgieva said fixing the public finances, including lowering public debt as a share of the economy, was essential, but should only happen once the pandemic was over.

"The economy is like a ship in rough waters, and this ship has not yet come to shore," she said.

Carbon taxes, valued-added tax and property taxes were all areas where Britain could boost revenue without hurting growth. IMF staff said tax increases would be almost inevitable.

GROWTH DOWNGRADE

Sunak said the IMF report endorsed his policies and his warnings that there would need to be action in future to reduce borrowing.

The IMF released more pessimistic forecasts for the British economy which it now saw contracting by 10.4% in 2020 and then growing by 5.7% in 2021, down from estimates published just a few weeks ago, due to the rising number of COVID cases.

Georgieva said the Bank of England should continue to keep monetary policy accommodative because of the "significant risk" inflation would come in weaker than its 2% target.

"This can be done by scaling up government bond purchases. Other tools like negative rates can be brought in after further understanding is developed on when they would be most useful in the UK context," she said.

The BoE is expected to expand its bond-buying programme next week while it considered the feasibility of taking Bank Rate- currently at 0.1% - below zero for the first time.

(Reporting by David Milliken; Writing by William Schomberg; Editing by Jonathan Oatis)