The economic hitmen have struck the UK

There are many men in dark glasses in Washington DC during the summer. Amongst the most feared have been the International Monetary Fund economists who fly around the world reviewing the policies of individual countries – so-called Article IV Consultations.

Such a team has been in the UK over the past weeks and a few moments ago I heard them issue the single most important external report on the UK economy from their headquarters in Washington DC. In it the IMF staff project that gross government debt could reach 100 per cent of GDP by 2014/2015 or 87 per cent on the net debt measure.

Britain seems to be being advised to engage in the sort of ‘Structural Adjustment’ of borrowing policies that the IMF used to force upon bankrupt developing countries. The IMF want the UK to come up with ‘specific measures’ – ie the detail of spending cuts.

The detail of the report makes specific reference to the need for a Comprehensive Spending Review, though concedes the actual cuts should probably be best timed for after a recovery starts. It points out that the debt markets, that will determine if and when Britain goes bankrupt, continue to give the UK the ‘benefit of the doubt’.

‘But it will not last forever. The UK should not test the limits of the markets, and [instead] outline an ambitious post-recovery consolidation plan,’ says Ajai Chopra the IMF’s mission chief to the UK.

In the government’s favour, the IMF acknowledges that the UK governemt was ‘ahead of the curve’ in sorting out its financial system, and those actions alongside the Bank of England’s seems to have ‘stabilised the patient’. But the IMF seems to be far more pessimistic about the potential Exchequer cost of those interventions, and so have government debt levels heading much higher than the Treasury.

There’s an irony here. Despite the protestations of the Prime Minister, the Chancellor has already set out a path for public spending that is as stingy as that forced upon the UK by the IMF in 1976. Britain is already attempting its own form of structural adjustment. The IMF is not expecting another visit in 2010. The economy is stable. The problem is that the UK is in a poor fiscal position to get past any further unexpected financial shock.