On 13 May 2016 the IMF issued a report following the completion of consultations with the UK under Article IV of the IMF’s articles of agreement.

The report notes that uncertainty arising from the upcoming referendum on EU membership has affected economic performance in the first part of 2016. In the event of a vote to stay in the EU economic growth is expected to recover in the second half of the year. Growth is likely to be below 2% in 2016 but is expected to recover to around 2.25% in the medium term, in line with potential.

Vulnerabilities include the low savings rate, the high level of household debt and the fiscal deficit which is still too high despite reductions in recent years. The largest risk and uncertainty relates to the EU referendum as a vote to leave the EU would create uncertainty around the UK’s long-term economic relationship to the EU and the rest of the world. The IMF considers that the long term consequence of a UK exit from the EU would be a substantial negative effect on UK output and incomes.

On the assumption of a vote to remain in the EU the UK should focus on steady growth and reduction of vulnerabilities. This requires fiscal consolidation to further rebuild buffers. Structural reforms are needed to boost productivity and incomes. The UK also needs more pro-growth spending, one priority being infrastructure.

The additional government spending could be funded by measures such as reducing distortionary tax expenditures including non-standard value added tax (VAT) rates to increase economic efficiency and neutrality. Another measure to increase financial stability would be changes to reduce the bias towards debt in the tax law. This could be done by adopting an allowance for corporate equity with offsetting changes in other parts of the tax code.

The UK has recently passed reforms to increase corporate transparency and to combat tax evasion, corruption, and other financial crimes. These changes included the establishment of a register of people with significant control (i.e., beneficial ownership) of UK companies and limited liability partnerships and a provision for the automatic sharing of beneficial ownership information between jurisdictions. The IMF considers that these reforms should be moved forward by enhancing the anti-money laundering (AML) and counter terrorist financing (CFT) regulatory compliance by trust and company service providers, lawyers and accountants.

Crown Dependencies (CDs) and British Overseas Territories (BOTs) with financial centers have also made a commitment to setting up central beneficial ownership registries for entities incorporated in their jurisdictions. The UK government has made arrangements with the CDs and BOTs on unrestricted access to this information by law enforcement and tax authorities. It will be important to ensure the quality of beneficial ownership information contained in these registries if they are to be effective, including by making them publicly accessible and by making similar arrangements in relation to trusts.