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

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

Finance crisis 'could lead to war', IMF warns

The global financial crisis could lead to social unrest and even war, the head of the International Monetary Fund warned yesterday. 

Dominique Strauss-Kahn said that the billions already pumped into the world economy risked disappearing into thin air unless there is massive reform of the financial sector. 

And he dealt a severe blow to Gordon Brown's plans for another debt-funded Budget giveaway by warning that the money might melt 'like snow in the sun'. 

At a meeting of the International Labour Organisation, Mr Strauss-Kahn warned that the global economic crisis is 'dire' with the threat of millions being pushed into poverty. 

The managing director of the global financial watchdog went on to warn governments against ploughing yet more fiscal stimulus into their ailing economies. He said: 'You can put in as much stimulus as you want. 

'It will just melt in the sun as snow if at the same time you are not able to have a generally smaller financial sector than before but a healthy financial sector at work.' 

The IMF has called on countries to pump 2 per cent of their gross domestic product into their economies in an attempt to reverse the global downturn. 

Of the international situation, Mr Strauss-Kahn added: 'Bluntly the situation is dire. All this will affect dramatically unemployment and beyond unemployment for many countries it will be at the roots of social unrest, some threat to democracy, and maybe for some cases it can also end in war.'

Chancellor Alistair Darling last week told MPs that 3.4 per cent of Britain's national wealth is already being spent on stimulating the economy. 


The Prime Minister is said to want another large-scale stimulus, and is about to embark on a world tour to drum up support for his approach ahead of next month's G20 summit. But the Confederation of British Industry has also warned that the move is 'unaffordable'. 

In a pre-Budget submission to Mr Darling, it took the unusual step of serving notice that it would refuse to support any further 'fiscal stimulus' because the public finances are in such a dire state. continues here

First full-year slump since 1940s, says IMF

A stark warning from the IMF that the world’s developed economies are collectively set to endure their first full-year contraction since the Second World War, triggering a global recession, sent shares plummeting again on both sides of the Atlantic. 

In its bleakest assessment yet of rapidly worsening global prospects, the International Monetary Fund predicted that industrial economies as a whole will shrink through next year by 0.3 per cent, in the worst such slump of the postwar era. 

The IMF said that the toll imposed by the downturn across the West would sap the strength of the world economy and cut global growth next year to an anaemic 2.2 per cent. That is down 0.8 points from its last forecast, made only a month ago, and is below the 2.5 per cent threshold at which the world economy is judged to be in the grip of global recession. 

Shares plunged in New York, in London and across Europe as the IMF’s grim prognosis fuelled alarm among investors about the economic peril now confronting the world.  

In London, the FTSE 100 index plunged by another 258.33 points, or 5.7 per cent, to 4,272.41, leaving it down by more than a third so far this year. In Europe, Germany’s Dax index sank 6.8 per cent, while France’s CAC 40 closed down 6.4 per cent. 

In New York, the Dow Jones industrial average of leading US blue chips sank by 4.85 per cent, and the broader-based S&P 500 index fell by more than 5 per cent, leaving American equities nursing their worst two-day loss since October 1987. 

As leaders, finance ministers and central bank governors of the key Western and emerging market economies prepare for two weekends of crisis talks – with “G20” meetings in São Paulo this weekend and in Washington next Saturday – the IMF urged governments to ramp up tax and spending measures to shore up global economic activity. 

“There is a clear need for additional policy stimulus relative to what has been announced so far,” the fund said. “Room to ease monetary policy should be exploited.” 

It added: “Financial stress is likely to be deeper and more protracted than envisaged [in its October forecast].” 

The IMF’s call for still more far-reaching measures to boost global growth came as it drastically cut its already dire forecasts for all of the world’s big economies. It now predicts that the US economy will shrink by 0.7 per cent next year, compared with its October forecast of meagre 0.1 per cent growth. In the eurozone, GDP is expected to drop by 0.5 per cent, down from the fund’s October expectation of a 0.2 per cent expansion. Britain is now forecast to bear the brunt of the global slump, with its GDP plunging by 1.3 per cent in what would be the worst year for the UK since the economy shrank by 1.4 per cent in 1991. 

In emerging and developing countries, the IMF now expects growth next year of 5.1 per cent – down a full percentage point from its October view as the knock-on impact of the West’s plight ripples around the world. 

Olivier Blanchard, the IMF’s chief economist, said that although action by the world’s governments and financial authorities to stem the crisis had been aggressive and comprehensive, further flare-ups in the economic crisis were likely. “We can’t be sure that there are no landmines left in the field,” he said. 

Mr Blanchard added that the spectre of Japanese-style deflation also loomed over the developed economies, although he believed that the probability of such a trend, with prices generally falling on a sustained basis, was still small. He cautioned that in some countries, such as the US where interest rates now stand at 1 per cent, there was only limited room left to shore up activity with rate cuts, so that governments would have to resort to using fiscal policy.  continues here
 

Interest rate cuts overshadowed by spectre of recession

IMF says world is heading for major downturn

Interest rates across the world were slashed yesterday as central banks took unprecedented emergency action in an effort to contain the worst economic threat since the Great Depression. 

Hours after the Government unveiled a £500 billion rescue package for the British banking system, the Bank of England joined forces with its counterparts across the Western world to cut rates by half a percentage point. 

The extraordinary level of coordination was designed to demonstrate resolve in the face of financial panic but failed to restore confidence in the stock market. Share prices rallied briefly in London but the FTSE 100 index closed down 239 points at 4,367, its lowest point for four years. 

In its bleakest forecast for years, the International Monetary Fund said that the world was entering a major downturn in the face of “the most dangerous shock . . . since the 1930s”. The US and Europe were either on the brink of or already in recession.

The Chancellor’s plan to part-nationalise the worst-hit banks, guarantee some of their debts and flood them with fresh supplies of cash drew a mixed reaction. There were accusations that he was favouring bank shareholders over ordinary taxpayers and breaching fiscal rules. 

The Government has earmarked up to £50 billion to inject into banks in return for preference shares and possibly ordinary shares. It has also offered to guarantee all short-term borrowings made by participating banks in the wholesale markets, a potential liability of £250 billion. A further £200 billion is being provided to money markets to allow banks to swap risky assets for Treasury bonds. 

Robert Chote, of the Institute for Fiscal Studies, said that the package could push the Government’s debts towards 50 per cent of national income. continues here