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The headwinds of economic change Matthew Warburton - 23/05/2013

Budget squeeze300In its latest statement on the UK economy, the International Monetary Fund urges the Government to rethink its latest plans for a £10 billion squeeze on tax and spending and bring forward proposals to boost infrastructure investment, particularly in transport and energy.

The UK is still a long way from a strong and sustained recovery, warns the IMF, and current austerity plans pose "headwinds" to growth that risk permanently damaging the prospects for medium term growth in the economy.

The IMF also expresses concern that the Help-to-Buy scheme is likely to push up house prices unless further measures are taken to stimulate an increase in housing supply, and recommends "fiscal disincentives" for holding land without developing it.

Most media coverage of the IMF statement, which sums up the outcomes of a two-week fact-finding mission to the UK, has focused on its criticism of the government's planned spending cuts. But the IMF is also trenchantly critical of the government's reluctance to devolve power and resources.

The IMF believes the most effective way to accelerate the implementation of infrastructure projects is to give more authority over planning decisions to local authorities, coupled with financial incentives provided through "greater revenue sharing".

Just a few days after the London Finance Commission's report, about which I blogged last week, the IMF has come to pretty much the same conclusion - routing all major public investment decisions through a gaggle of Whitehall departments is no way to deliver local growth.

Better for government to devolve those decisions to localities and create incentives for development by allowing localities to share in the benefits of growth by allowing a much bigger share of tax revenues to be retained locally.

Commenting on the London Finance Commission's report in Public Finance, Steve Freer, Chief Executive of CIPFA, argues that one reason why the Commission's proposals could win wide support is that they propose better arrangements for London which are not at the expense of other areas.

Quite the reverse - reform in London would probably be supported by other cities as a stepping stone towards getting the same deal for themselves.

In contrast, the New Homes Bonus, virtually the only fiscal incentive for promoting local development, simply redistributes a fixed pot of government grant to those councils which enable the most new homes - at the expense of areas where there is less development. Both parts of the IMF message need equal attention in any government rethink of economic strategy.

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