The IMF’s relatively gloomy forecasts for the UK economy in 2023 should be taken with a fistful of salt. For a start, the organisation’s track record here is poor and some of the assumptions – especially about energy prices and interest rates – already look out of date.
The differences between the numbers for the UK and our peers in the rest of Europe are also well within the usual margins of error. Admittedly, the UK is the only major economy which is forecast to be heading into a full-year recession, with GDP falling by 0.6% in 2023. But the German economy is only expected to grow by 0.1%.
And it is daft to focus solely on one year’s growth, anyway. If we must play this game, perhaps we should also look at 2021 or 2022, when the UK was one of the best performers! Of course, that partly reflected a rebound from a bigger fall in UK GDP in 2020, but that makes it an even bigger achievement.
Or what about 2024, when the IMF’s forecast for the UK has actually been revised up?
Finally, it is worth noting that the IMF’s interim updates are pretty skimpy, with just some headline numbers and a few lines of commentary. This has not deterred the usual suspects from blaming everything on Brexit. But there is no new analysis here to support that claim.
Nonetheless, the UK economy has been underperforming its potential for many years. Taken at face value, the IMF forecasts underline the case for a pro-growth strategy which tackles the major problems which have been holding us back.
These headwinds include the decline in labour force participation, the weakness in business investment, and sky-high energy bills. A comprehensive programme of supply-side reforms is required to boost productivity and real wages.
The IMF does at least note that the downward revision to its UK forecasts for 2023 reflects tighter fiscal and monetary policies and a longer period of high energy prices.
In contrast, the 2023 forecasts for the euro area have been nudged up slightly, reflecting the announcements of additional fiscal support in the form of energy price controls and cash transfers.
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This should add to doubts about the wisdom of raising UK taxes even further, including the planned hike in corporation tax in April from 19% to 25%, ending the “super deduction” on capital spending, and extending so-called “windfall taxes”, all of which are damaging business investment.
The Chancellor’s vision now seems limited to redistributing the burden of corporate taxation, by hinting at cutting taxes that are less (or not) dependent on profitability (notably, business rates and employer National Insurance contributions), while raising those that are. This is not an unreasonable strategy, but it has its flaws, and all that businesses (and households) can see right now is higher taxes.
There is a clear risk too that government support with sky-high energy bills is withdrawn too quickly. This form of state intervention can only ever be a short-term fix. The UK energy market also needs more fundamental reform after years of government meddling. However, if you want to explain why the IMF is more pessimistic about the UK than the euro area, then different policies on energy subsidies are a crucial part of the story.
It has even been argued that the downward revision to the IMF’s UK forecasts – due to tighter fiscal policy and still-high energy prices – is the fault of Liz Truss and Kwasi Kwarteng’s plan to cut taxes and provide more support with energy bills. If you think that makes no sense, then I would suggest you are absolutely right. Unfortunately, “Trussonomics”, like Brexit, has become a convenient scapegoat for other failings.