UK needs tax rises not cuts, says IMF as it brands chancellor's future spending plans unrealistic

The IMF brands Hunt's spending plans 'unrealistic', as ITV News Economics Editor Joel Hills explains

Countries don’t usually go bust, they get bailed out.

And when it comes to resources, reach and authority, the International Monetary Fund (IMF) is the organisation that acts as global lender of last resort.

The IMF’s job is to disperse emergency loans to nations in financial distress.

It also attempts to prevent governments from getting into trouble in the first place but its advice isn’t always welcome.

The latest installment of the IMF’s World Economic Outlook - its assessment of the prospects for the world economy - will not be going down well in Downing Street.

The IMF has downgraded its forecast for economic growth in the UK next year and cautions Rishi Sunak’s government against tax cuts.

Indeed, the IMF suggests there’s a strong case for putting taxes up, given that, it believes the pressures on the public finances in Britain will only increase in the years ahead.

IMF advises against further tax cuts after downgrading its forecast for economic growth in the UK

An IMF spokesperson said: “Preserving high-quality public services and undertaking critical public investments to boost growth and achieve the net zero targets, will imply higher spending needs over the medium term than are currently reflected in the government’s budget plans.

"Accommodating these needs, while assuredly stabilising the debt/GDP ratio, will already require generating additional high-quality fiscal savings, including on the tax side."

The statement goes on to suggest that hiking property or wealth taxes in the UK and/or ditching the triple lock on pensions might be a good idea before adding: “It is in this context that staff advises against further tax cuts”.

The IMF’s language may seem alien and mysterious but it reads, in economist-speak, as an authoritative challenge to the government’s economic strategy. The timing - five weeks away from the Budget - is incredibly inconvenient for the chancellor.

Earlier this month Jeremy Hunt told ITV News that his priority in the Budget would be to cut taxes and that doing so would revive our economic prospects.

'If I can, I would like to reduce the tax burden,' the chancellor said

“I look at the numbers around the world,” Mr Hunt said. “And I see that places like America and countries in Asia that have lower taxes have more dynamic economies and grow faster. And that's what I would like us to be."

The IMF is rarely explicitly critical of wealthy advanced economies and is often useful ally.

In 2010, the Cameron-Clegg coalition government pursued its programme of austerity (spending cuts and tax rises) with the IMF’s public backing, initially at least.

In September 2022, the IMF warned Liz Truss’s government that her proposals for unfunded tax cuts were ill-advised and risked pushing up prices and fuelling inflation.

It would be wrong to suggest the IMF’s intervention brought Liz Truss down but it did contribute to the erosion of her credibility.

Mr Hunt has been under pressure to cut taxes from MPs within his party for some time and the temptation to do so in an election year will be strong - not least as the latest opinion polls suggest the Conservatives face the prospect of an emphatic defeat.

Have you heard our new podcast Talking Politics? Every week Tom, Robert and Anushka dig into the biggest issues dominating the political agenda…

The “tax burden” in the UK (the amount of tax we pay as a share of national income) is on course to reach a post-war high of 38% of GDP, according to the Office for Budget Responsibility.

Since 2020, the government has spent billions of pounds supporting British households and businesses through both the lockdown imposed during the pandemic and the wave of inflation triggered by Russia’s invasion of Ukraine. It has done so using borrowed money.

The nation’s stock of debt is rising, the cost of servicing it has increased (in line with inflation and interest rates) and the outlook for economic growth (and with it tax revenues) is weak.

Nevertheless, the chancellor reduced the main rate of national insurance by 2 percentage points in January and has signalled there’s more to come.

In recent months, the headline rate of inflation has faded and markets have begun to bet that the Bank of England will soon think about cutting interest rates.

In theory, Mr Hunt’s self-imposed “borrowing rules” (which include a target of cutting debt as a share of GDP in five years' time) mean that there is some scope for giveaways in his Budget.

But the Institute for Fiscal Studies (IFS) warns that any taxes cuts ahead of a general election are likely to prove temporary, not least because the government’s current spending plans are, in its view, unrealistic.

Last week, the IFS estimated that “unprotected” government departments face a funding shortfall of £20 billion a year from 2024/25 onwards.

The IMF shares the belief that the reduction in expenditure on public services is “very challenging” - so much so that the IMF assumes it will not happen.

“January’s tax cuts were essentially paid for by a squeeze on future public service spending plans which might not be delivered,” says Carl Emerson of the IFS, in response to the IMF’s comments.

“And government debt is forecast to remain elevated for the next few years. The economic case for further tax cuts prior to a detailed spending review is therefore weak to say the least."

Responding to the IMF’s comments, Mr Hunt said: “The IMF expect growth to strengthen over the next few years, supported by our introduction of the biggest capital investment tax reliefs anywhere in the world, alongside National Insurance cuts to improve work incentives.

"It is too early to know whether further reductions in tax will be affordable in the Budget, but we continue to believe that smart tax reductions can make a big difference in boosting growth.”

Want a quick and expert briefing on the biggest news stories? Listen to our latest podcasts to find out What You Need To Know...