IMF says scrap pensions triple lock and warns post-election tax rises are likely

The IMF is recommending interest rates are cut this year, but warned the government about making further tax cuts, ITV News' Business and Economics Editor Joel Hills explains

The economy is heading toward a “soft-landing” but brace yourself for higher taxes.

This, in a single sentence, is the concluding statement of the International Monetary Fund’s Article IV Mission in the UK.

First, the good news.

Inflation has faded faster than the IMF was expecting a year ago and economic growth in 2024 has proved stronger.

The UK economy is now forecast to expand by 0.7% this year (a slight upgrade on last month’s forecast) before growth picks up to a more normal-looking 1.5% next year on the back of stable price, lower interest rates and rising household incomes.

The IMF still characterises the UK’s long-term prospects as “subdued” and there are plenty of economic issues (like a rise in economic inactivity) that need tackling, but not so long ago the idea that inflation could be brought under control without a significant recession or a sharp rise in unemployment seemed unlikely.

Soft landings are preferable to hard landings but here’s the hitch.

The IMF judges the government’s existing spending plans beyond next March to be unrealistic and warns that whichever party triumphs in the forthcoming election will likely have to either raise taxes or cut spending.

And the IMF believes, given the state of public services, that tax rises are more probable.

Whoever forms the next government will immediately face what the IMF calls “tough choices”.

National debt as a share of GDP has reached its highest level for 70 years and shows no sign of falling; interest rates and therefore debt interest costs are high; the “Tax Burden” (tax revenues measured as a share of national income) has risen and is heading to UK record levels; and public services are visibly under strain.

Chancellor Jeremy Hunt. Credit: PA

In March this year, the Chancellor unveiled a Budget which delivered tax cuts - which are always lovely to have - predicated on big cuts in public investment spending (necessary to lift economic growth and fund the transition to Net Zero) and cuts to spending in many areas of public services beyond 2024/25.

The IMF has been signalling for a few years that preserving public services in the UK and raising public investment would likely require higher taxes.

In January, it said so explicitly and advised the chancellor against cutting taxes in his Budget. Jeremy Hunt chose not to take that advice. In March, he cut National Insurance for a second time in six months and has since said he hopes to reduce it again before the election.

The IMF says the government will find it “difficult” to stick to its spending plans beyond next year so it has pencilled in spending projections of its own.

The result: the IMF calculates that whoever forms the next government will probably need to achieve a fiscal consolidation of 1% of GDP to prevent debt rising during the next parliament.

Put another way: the next government will have to either raise taxes or reduce spending by around £30 billion a year at some point.

This is a very large number. Reversing the two National Insurance we’ve had since last November would raise c£20 billion a year so wouldn’t be enough.

Helpfully, the IMF recommends ways in which that money could be raised. These include scrapping the Triple-Lock on pensions, broadening the bases for VAT and Inheritance Tax or reforming capital gains and property taxation.

Neither Labour or the Conservatives have announced scrapping the triple lock on pensions. Credit: PA

As things stand, neither the Tories nor Labour is set to make any of these options election pledges.

The IMF suggests an alternative solution. The next government might decide to restrict the services the state provides.

One idea it floats is the “expanded use of charges for public services”. The IMF doesn’t elaborate but most working-age adults in England pay for their prescriptions, for dentistry and optometry. Charges could be extended to cover GP appointments, for example.

The IMF doesn’t offer opinions on what political choices should be made, only that choices should made.

In the circumstances, the IMF repeats its view that further tax cuts would be unwise.

The point here is that, in the IMF’s view, the current situation is unsustainable. Something needs to give, the centre cannot hold.

Political decisions need to be made about what the size of the state should be, what services the government should provide and how those services can be adequately funded.

As ever, the IMF’s language is careful and caveated. The aim appears to be to improve the public debate (and with it public policy) without causing the government of the day any embarrassment.

But the IMF’s message is clear enough. As things stand, whoever wins the next election will probably spend more than they are currently telling you they will spend and will therefore raise taxes in a way they are not being transparent about.

We have been warned.

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