IMF sets out three ways UK can help economy recover from coronavirus

COVID-19 has reduced the global GDP by an estimated 16 percent according to an analyst at Goldman Sachs, and recovery in the short term is looking unlikely.

The IMF has set out three proposals to the UK on how they can best recover their economies.

Their first proposal was to recommend governments to begin large scale building projects.

This is because of historically low interest rates from the Bank of England, with base rates at 0.1 percent.

Andrew Bailey, Governor of the Bank of England, believes the new rate is the lowest that rates can effectively go.

The IMF has recommended the UK take advantage of this, as low private investment levels mean the state is unlikely to “crowd out” any other profitable spending by soaking up cash or workers required for businesses’ needs.

The body recommended that this should include transport infrastructure and green energy projects.

It takes time to launch new schemes so governments should plan to immediately start work when the pandemic allows.

The IMF says in the latest chapter of its Fiscal Monitor: “To reduce implementation lags and guide expectations, policymakers should act swiftly to establish a pipeline of appraised investment projects now that can be implemented when the health crisis abates, and plan discretionary measures that can be deployed quickly.”

It comes as the UK’s construction industry suffered it’s biggest ever slump in the pandemic.

The monthly IHS Markit/Cips snapshot showed the main construction activity index fell from 39.3 in March to 8.2 in April, the lowest since the figures begun collection in April 1997.

More than four-fifths of firms surveyed, equal to 86 percent, reported a drop in business activity since March.

Residential and commercial construction sectors were the hardest hit, but civil engineering also declined at a record pace.

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The second proposal recommends that governments cut taxes to release more funds to businesses and households, which may stimulate more spending.

The IMF suggests “temporary value-added tax cuts or tax policies targeted at low-income households (such as a flat, refundable tax rebate) or tax policies affecting firms (such as cyclical investment tax credits).”

This would match Britains VAT cut in the 2008 financial crisis.

Concerns arise with this proposal as it would mean releasing more funds and accruing more debt.

The third proposal from the IMF said to increase benefits to offset the effects of mass unemployment.

The IMF said: “To increase the effectiveness of safety net programs, their design should be improved to strike a balance between demand support and work disincentives.

“An option includes gradually removing benefits as employment incomes increase.”

The UK is considering implementing a form of this, as recently reports suggest options for a gradual closure of the scheme could be cutting the 80 percent subsidy that the government will cover to 60 percent, and lowering the £2,500 cap on monthly payments.

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