The IMF said it broadly approved of the Government's 'prudent management' of its finances, which, it argued, had supported the pursuit of zero inflation through a tight interest rate policy.
But some IMF directors were worried about the Government's commitment to its fiscal policy. The Government aims to balance its budget on average over several years, although it accepts that borrowing has to take place when the economy is weak, because tax revenue automatically falls and spending on benefits rises.
The Treasury publicly argues that the public sector finances would be roughly in balance were it not for the automatic effects of recession. But Treasury officials completed an unpublished study during the summer showing that, on current policies, there would still be a public sector borrowing requirement of pounds 5bn-pounds 10bn once the economy had recovered.
Some IMF directors said Britain's underlying fiscal position left 'little scope for any further loosening', but others thought a further stimulus might not produce an unacceptable rise in inflation because the economy was still so depressed.
The Treasury forecast at the time of the Budget that the public sector borrowing requirement would be pounds 28bn in 1992-3, but now privately believes the figure will be well over pounds 30bn. City and academic forecasters expect a deficit of about pounds 33bn.
The IMF said Britain should continue to aim to match the lowest inflation rates in the exchange rate mechanism, despite 'the continued weakness of the recovery'. Directors were split on whether Britain should quickly narrow the ERM bands within which sterling can vary, because volatile currency markets 'might lead to undue changes in interest rates'.
High interest rates in Germany might be bearing too heavy a burden in restraining price increases and money supply growth there, the IMF said. The resulting uncertainty in financial markets could have 'undesirable effects' on prices and medium-term industrial capacity in Germany and other ERM countries.
The IMF approved of British structural reforms aimed at improving the operation of markets, but some directors saw need for better training programmes. Efforts at structural reforms in France and Italy received a much more lukewarm response.
The annual report was published ahead of the IMF's autumn meeting in Washington later this month. The IMF wants quick approval for a 50 per cent increase in member countries' capital contributions. The absence of approval so far by the United States and Italy has helped to delay the move. The IMF says it needs more resources because of a flood of new members, including the former Soviet republics.Reuse content