On 20 December 2017 the International Monetary Fund (IMF) published on its website a report following consultations with the UK under Article IV of the IMF’s articles of agreement.
The IMF report notes that owing to the aging population in the UK government spending on healthcare, long term social care and pensions is projected to rise by 1% of GDP between 2020 and 2025 and by much more after that date. Any shrinkage of output resulting from Brexit would therefore shrink the revenue base from which to meet the spending. The UK may therefore face difficult decisions about financing and delivery of public services.
The report notes that deficit reduction in recent years has relied mainly on reduction of government spending. The report recommends that a more balanced approach may now be required involving tax reforms, which can also be justified on efficiency grounds.
The IMF report suggests that scaling back the preferential value added tax (VAT) rates for certain goods would increase tax neutrality in addition to raising more revenue. Further alignment of the tax treatment of employees and the self-employed could make the tax system fairer and bring it into line with current employment practices. The bias toward debt in the tax code could be reduced by adopting measures such as a tax allowance for corporate equity. Rebalancing the taxation of property by taxing on the basis of values rather than transactions could increase mobility and encourage more efficient use of the housing stock.
The report recommends relaxing the “triple lock” on pensions to help to contain the rising demographic spending over the longer term.The triple lock, introduced in 2011, guarantees that the basic state pension will rise each year by a minimum of either 2.5%, the rate of inflation or average earnings growth, whichever is largest.
Infrastructure spending has increased and there are further plans for capital spending through the National Productivity Investment Fund, announced in 2016 to improve the quality of infrastructure and raise productivity. Efforts are being made to improve human capital through the introduction of T level qualifications and the apprenticeship levy. Continuing efforts are needed to boost the housing supply through reform of planning restrictions and of property taxes to deal with the housing shortages that prevent workers moving from one location to another to take up job opportunities.
Further measures have been adopted to increase the transparency of companies and trusts. The report notes that the establishment of central registers of ownership of companies and trusts is a positive development, but mechanisms to verify ownership information should be strengthened. Also important is continued engagement with the Crown Dependencies and Overseas Territories on the exchange of company and trust information.
