Britain should increase spending to tackle the second wave of the Covid-19 pandemic without worrying about its growing debt levels, the International Monetary Fund has said.

In its six-monthly health check of the UK economy, the Washington-based organisation warned on Thursday that the UK faced a difficult winter that was likely to depress economic growth and increase the number of jobs lost, especially among those with few skills.

In its latest forecast for the UK economy, the IMF said it expected a decline in GDP growth of 10.4% this year, compared with an estimate a month ago of -9.8%. An expected rebound in GDP growth next year was pared back from 5.9% to 5.7%.

The IMF said the UK government had the capacity to increase spending on measures to protect jobs and boost infrastructure investment to limit the impact on the economy of the winter surge in coronavirus cases.

A spending review, which the chancellor Rishi Sunak will make to parliament on 25 November, should go ahead, the report said, but mainly to reassure businesses that government investment plans would be maintained along with increases in welfare payments.

Sunak is facing disquiet among Tory MPs at steep increases in the public spending deficit, which the IMF said would rise to 16.5% in this financial year, higher than the 10.1% level after the 2008 financial crash.

Concerns about the government’s rising debts must be considered, but only when the private sector has returned to sustained growth, the report said.

“The economy is like a ship in rough waters, and this ship has not yet come to shore,” said the IMF’s managing director, Kristalina Georgieva.

With only a few weeks left to negotiate a Brexit deal with Brussels, Georgieva said the EU and UK should agree a settlement or risk lasting damage that would make an already difficult situation worse.

Born in Sofia, Bulgaria in 1953, Kristalina Georgieva is the first eastern European to head the International Monetary Fund (IMF). She studied economics, political economy and sociology in Sofia, and has additionally studied at LSE and MIT. She held a range of academic positions before going into the world of finance. 

Prior to taking up her role at the IMF she had worked at the World Bank Group between 1993 and 2010. She left there to take up a role as European commissioner for humanitarian aid and crisis management. She returned to the World Bank Group in the role of chief executive in 2017.

On her appointment to the IMF role in October 2019, she said: "The IMF is a unique institution with a great history and a world-class staff. I come as a firm believer in its mandate to help ensure the stability of the global economic and financial system through international cooperation. It is a huge responsibility to be at the helm of the IMF at a time when global economic growth continues to disappoint, trade tensions persist and debt is at historically high levels."

“We strongly encourage the UK and EU authorities to make every effort to reach an agreement. Progress on a range of issues has been made over the past year and there is room for a compromise beneficial to both sides.

“A solution would remove important downside risks from the outlook. Regardless of the outcome, it will be important to prepare the economy, firms, and people,” she said.

Georgieva also praised “the enormous efforts the authorities have made to contain the impact of the pandemic in the UK”.

She said: “The unprecedented package of fiscal, monetary, and financial sector support measures has helped to sustain incomes, keep unemployment down, and curb corporate insolvencies.

“It is one of the best examples of coordinated action that we have seen globally. We welcome the continuing efforts the government has made to refine its support measures, including adaptations to the jobs support scheme announced last week.”

However, the increased debt levels among many UK companies and the likelihood that some will go bust over the coming months should be tackled to prevent a steep rise in unemployment.

“We support an additional fiscal push, centred on public investment and enhancing the safety net. This represents an opportunity to ‘build forward’ and address the UK’s climate targets, reduce regional inequality, and help those who do end up losing their livelihoods,” she said.

Asked whether the government should join France and Germany and impose a national lockdown, she said the question was best left for epidemiologists and other health advisers.

“My main message today is that continued policy support is essential to address the pandemic and to sustain and invigorate a recovery,” she said.

The report also urged the Bank of England to inject further funds into the economy to keep interest rates low and bolster business and household confidence.

Georgieva said the central bank would need to deploy further measures to prevent inflation falling, which may include negative interests rates.

“This can be done by scaling up government bond purchases. Other tools like negative rates can be brought in after further understanding is developed on when they would be most useful in the UK context,” she said.

The Bank is widely expected to expand its bond-buying programme next week while it examines the impact of negative rates that would take its base lending rate – currently at 0.1% – below zero for the first time.

In the wake of the 2008 financial crash, the IMF had warned the UK against spending increases and endorsed the then chancellor George Osborne’s austerity programme.

However, under Georgieva’s leadership, the organisation has revised its thinking and throughout the pandemic has urged the UK and other rich nations to boost spending to minimise the economic damage caused by the virus. The IMF is a lender of last resort to countries in financial distress and, as with the UK, issues regular assessments of its members’ economies.