IMF calls on Clarke to bring down deficit

The Chancellor of the Exchequer needs to take "corrective measures" in November's Budget to get the Government's finances moving back towards balance by the end of the century, the International Monetary Fund warned yesterday.

The IMF, the world's financial policeman, predicts that the UK will be one of only five EU countries not to meet the Maastricht Treaty requirement of a government budget deficit below 3 per cent of GDP in 1997. France and German will scrape under the wire, but it expects the UK, along with Greece, Italy, Portugal and Spain, to miss the target.

Michael Mussa, the IMF's director of research, said: "The timetable for moving towards budget balance has slipped. It would desirable to get it back on track."

Mr Mussa was careful to say Britain's public finances were not in such a weak state that dramatic tax increases or reductions in spending were needed. But he said: "It means a modest correction to get back on the desirable path."

The IMF's latest World Economic Outlook said it was essential for European countries to continue to make progress on cutting their budget deficits. Flemming Larsen, deputy head of research, said the continental countries must also focus on deregulating their labour markets.

"Without any significant further progress on structural reform, we would not expect European unemployment to be much below 8.5 per cent by the year 2000," he said.

Although admitting the danger that the Maastricht timetable could slow growth in Europe, he said there was no alternative. "Overall, consolidation has been associated with somewhat weaker recovery than might have otherwise been the case," he said.

If growth in Europe continued to be weaker than expected the IMF would become concerned that the Maastricht process had created a vicious circle with efforts to cut budget deficits reducing growth, which in turn increased the budget shortfall.

The fund added that there was some scope for lower interest rates in continental Europe where this would not threaten the achievement of low inflation.

Mr Larsen said: "It is too soon to conclude that the recent round of interest rates has fully run its course."

The IMF forecasts for the world economy are essentially optimistic. The slight pick-up it expects in industrial country growth is unlikely to bring higher inflation.

It expects growth in the industrial countries to average 2.3 per cent this year and 2.5 per cent next. It has revised up its forecast for the UK next year to 3 per cent from the earlier prediction of 2.7 per cent.

The US growth forecast has also been revised up slightly to 2.4 per cent in 1996 and 2.3 per cent next year. Japan is likely to be one of the fastest growing industrial economies, expanding 3.5 per cent this year and 2.7 next.

Growth in the developing countries was expected to moderate slightly next year, especially in Asia.

The IMF yesterday called for higher interest rates in both US and the UK, the day after the Federal Reserve made its surprise decision not to increase US rates. Mr Mussa said: "The prudent course would be to have some slight firming of monetary conditions."

Mr Mussa said this was not intended as a judgement on the Fed's decision, and the need for higher rates was not urgent. But according the fund's World Economic Outlook "margins of unused resources in the US economy appeared to be virtually exhausted and the unemployment rate has fallen to a level that, in the past, has been associated with rising wage and price pressures".

It said there was room for further reduction in British unemployment without undue inflationary pressure, but the economy would grow at a rate above its potential next year.

Mr Mussa said interest rates would need to move modestly higher. "This is not a crisis situation but it a question of prudence," he said.

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