Britain must charge for health care and raise retiring age to escape debt crisis, says IMF

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Britain has been told that it must make radical changes to the pensions system and shake-up the health care system to tackle the nation's mounting budget crisis.

The International Monetary Fund is demanding fundamental reforms, which go far beyond the spending cuts currently being readied by the Labour government and Conservative opposition, so as to 'help keep a lid on the debt.'

The Fund's direct intervention in Britain's political debate, ahead of a general election, is highly unusual and reflects its fears for Britain's financial stability unless there is root and branch change in Britain's bloated public sector.

The public reprimand is bound to rekindle memories of the humiliation of the Callaghan government in 1976 when the IMF forced massive budget cuts on Britain to half the collapse of the pound.

The next government will 'have to take measures that improve the medium term debt outlook. That means reforms of the retirement system, that means reform of the healthcare system,' the Fund's top economist Oliver Blanchard told as press conference at the IMF and World Bank annual meeting in Istanbul.

At the core of the radical reform of Britain's pensions would need to be a rise in the national retirement age from 65-years which could save future governments billions of pounds a year.

Another obvious target would be 'unfunded' public sector pensions based on the final salaries of workers with a potential cost to the Exchequer of up to £1trillion.

On the health care front the IMF has long advocated that Britain introduce charges and bring an end to the high cost, free for all National Health Service.

Spending on the NHS has doubled to almost £90billion since Labour came to office in 1997.

The IMF's attack on two core pillars of the welfare state will be deeply embarrassing for Gordon Brown who took the brakes off public spending to try and improve the health service.

'These reforms have to be confronted, the idea of just going to put fiscal rules on and not do these reforms is a joke,' Blanchard insisted.

It is highly unusual for the IMF to be so prescriptive about what the British government needs to do to set policy on the right track. It indicates how seriously it takes the buildup of a debts mountain by Gordon Brown's government as it has battled to keep the banks afloat and prevent an economic slump.

On current trends the IMF estimates that by next year debt will represent 81.7 per cent of the country's total output and despite planned cuts and tax increases this figure will have reached an alarming 98.3 per cent of output by 2014.

The intervention of the IMF into the British political debate must be regarded as a rebuff for the government as it prepares its Pre-Budget Report.

But it could be seen by the Conservatives as the green light to tackle long standing problems like public sector pensions, the retirement age and long term health care.

The idea of raising the retirement age beyond 65-years or daring to tackle public sector pensions is likely to go down like a lead balloon among Labour's biggest financial supporters in the trades unions.

The IMF economics chief's incendiary comments came at a press conference at which the offered the Chancellor Alistair Darling a glimmer of hope by raising his growth forecast for the British economy next year to 0.9 per cent, an upgrade from its previous forecast of just 0.2 per cent.

But even at this level it is still below Alistair Darling's March budget projection of a modest 1.25 expansion.

The upgraded UK forecast was accompanied by caution that 'employment losses in the UK' could persist 'because they reflect not just recessions but a housing bust and systemic financial crises.'

The Fund projects unemployment in Britain surging from 7.6 per cent of the workforce this year 9.3pc next year against the modest 5.5 per cent level seen before the slump began late last year.

In its World Economic Outlook report the Fund also cast serious doubts on whether the recent apparent stabilisation and bounce in house prices - seen in the Halifax and Nationwide indexes - can be sustained.

It notes that although UK house prices have fallen by 20 per cent during the recession 'there could still be a significant correction to come.'

The Fund's projections 'consistently point to further large declines in the United Kingdom' as well as Spain and Denmark.

Despite large scale budget deficits in Britain the IMF urges the government to hold off on cuts this year 'until the recovery is on a firmer footing' and suggested that spending may have to be increased beyond current plans if the economy should stall again.

But it warns that such an expansionary policy will become less effective unless the government sends a clear signal to the financial markets that it will commit to large reductions in public borrowing once the recovery has taken hold.

The IMF's chief economist was in a far more buoyant mood about global prospects than last Autumn and in the Spring when the whole world moved into recession for the first time since the second world war. There was concern that in the wake of the financial panic there could be a new great depression. continues here

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