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IMF tells UK government to keep spending as it downgrades GDP forecasts

International Monetary Fund Managing Director Kristalina Georgieva listens during an event at the World Bank February 10, 2020, in Washington, DC. (Photo by Brendan Smialowski / AFP) (Photo by BRENDAN SMIALOWSKI/AFP via Getty Images)
International Monetary Fund managing director Kristalina Georgieva told UK ministers to keep spending despite ballooning debt. Photo: Brendan Smialowski/AFP

The UK government should keep up significant public spending despite soaring public debt to safeguard firms and jobs, according to the head of the International Monetary Fund (IMF).

The global institution has revised down growth forecasts published only a few weeks ago for the UK economy, and now predicts it will decline by 10.4% this year and rebound just 5.7% next year.

The IMF is best known for pushing fiscal conservatism, but its managing director Kristalina Georgieva even said Britain should consider an “additional fiscal push” to boost investment. She welcomed previous efforts to boost Britain's public safety net, like a hike to universal credit benefit payments earlier this year.

“Continued policy support is essential to address the pandemic, and to sustain and invigorate recovery,” she said at a virtual press conference alongside UK chancellor Rishi Sunak.

Georgieva also urged the Bank of England to maintain an "accommodative" policies, scaling up government bond purchases. Negative rates could be brought in once there was "further understanding" of how they could best be used in the UK.

Official figures last month showed UK government borrowing is at its highest in decades, and public debt stands at its highest level compared to the size of the economy since 1961. New IMF figures suggest Britain’s budget deficit will hit 16.5% of GDP, higher than during the global financial crisis.

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But the IMF chief said the UK government should hold off efforts to plug the budget deficit or bring down debt until there were “clear signs we are durably exiting the health crisis and business activities are picking up.”

“The economy is like a ship in rough waters. This ship has not yet come to shore where it can be anchored,” she said.

Eventually the government should strengthen public finances and “take good care of building buffers,” however. She told journalists: “We have seen how good it is to have a strong fiscal stance when a crisis of this magnitude hits.”

Georgieva even offered her take on how Britain could seek to plug its budget gap in the medium term, saying the country should look at new property and carbon taxes.

Asked if the government should consider tax rises or spending cuts in future, she said it should make a “well-calibrated choice” based on what would support growth.

WATCH: Why tax rises may be inevitable in Britain

An IMF report on the UK economy published on Thursday said the authorities' "aggressive" economic policy had been "one of the best examples of coordinated action globally."

Sunak welcomed the comments, saying the IMF had "recognised that our strategy is working."

"I know people watching this will be worried about the difficult weeks and months to come," he said.

"But with our Plan for Jobs, we have the right policies in place to protect jobs and businesses through the winter period."

Georgieve also addressed Brexit, warning it was a risk to the UK economy. She said UK and EU authorities needed to make "every effort" to reach an agreement on trade, saying there was "room for compromise beneficial to both sides.