The director of the fiscal affairs of IMF, said a case could be made for a sharp rise in public investment in the UK, so long as it was productively spent and could be financed safely by the government.
It was cautioned that it could not give unconditional backing to an investment surge and to new budgetary rules allowing debt to rise again because Britain’s underlying public finances were quite weak and a messy Brexit outcome could weaken them further.
Mr Gaspar pointed out that the UK was not like Germany, where the IMF has urged greater public investment and where interest rates are effectively negative. Mr Javid, who will be in Washington talking to the IMF and his finance minister counterparts from other countries, will have hoped for a more enthusiastic reception.
The chancellor has justified the likely move on the basis of “taking advantage of incredibly low interest rates and borrowing-to-build”. Mr Gaspar praised the UK’s understanding of its public sector balance sheet and the independent Office for Budget Responsibility.
The OBR undertakes stress tests of Britain’s public finances that, he said, are “close to the frontier of best practice”. He added that a case could be made for Mr Javid’s plan for a new fiscal framework that would allow more public investment, raising public debt, but that would also improve the asset side of the UK public balance sheet.
Mr Gaspar said:
If you’re asking about an initiative on public infrastructure in the UK, that is something that improves the potential of the UK economy in the long run, and it’s something that can be safely financed at favourable terms by the Treasury, that does seem to be a public investment criteria for a good project,
But he added that this did not mean it was possible to produce a simple rule for the amount of investment that should happen, especially with Brexit uncertainties hanging over public finances. Britain’s years of high deficits and the selling off of more public sector assets than most other comparable countries have left it with the second weakest public sector balance sheet of countries the IMF has examined.
It has only avoided the wooden spoon thanks to Portugal. “The UK has a very negative net worth position, so the discussion of what is the wise public finance strategy does require quite a demanding control of the details and there is a lot of uncertainty associated with the process of Brexit to factor in.” Mr Gaspar said the IMF would assess the details of any proposals Mr Javid made once they were published.
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