ITV News economics editor Joel Hills explains: IMF brands Hunt’s spending plans ‘unrealistic’
Usually countries are bailed out rather than bankrupt.
And when it comes to resources, influence, and authority, the International Monetary Fund (IMF) is an organization that acts as a global lender of last resort.
The IMF’s job is to distribute emergency loans to countries in financial distress.
It also tries to prevent the government from getting into trouble in the first place, but its advice is not always welcomed.
The latest edition of the IMF’s World Economic Outlook, an assessment of the outlook for the world economy, will not go down well in Downing Street.
The IMF has cut its forecast for UK economic growth next year and warned Rishi Sunak’s government against cutting taxes.
Indeed, the IMF believes that pressure on the UK’s public finances will only increase in the coming years, suggesting there is a strong case for tax increases.
IMF cuts UK economic growth forecasts, recommends against further tax cuts
An IMF spokesperson said: “Maintaining high-quality public services and making significant public investments to boost growth and achieve net-zero targets will take longer in the medium term than is currently reflected in government budget plans.” This suggests that additional spending will be necessary.”
“Addressing these needs while ensuring that the debt-to-GDP ratio remains stable will already require generating additional high-quality fiscal savings, including on the tax side.”
The statement went on to suggest that raising property and wealth taxes in the UK or abolishing the triple lock on pensions could be a good idea, saying: “Given the circumstances, “Staff recommends against further tax cuts,” he added.
The IMF’s words may seem foreign and mysterious, but in the words of economists, they represent an authoritative challenge to governments’ economic strategies. The timing, with only five weeks until the budget, is extremely inconvenient for the prime minister.
early this month Jeremy Hunt told ITV News that his priority in the Budget is tax cuts. This would also improve the economic outlook.
Prime Minister: “If possible, I would like to reduce the tax burden”
“I look at the numbers around the world,” Hunt said. “And we find that lower-tax countries in America and Asia have more dynamic economies and are growing faster. And that’s what we want to see, too.”
The IMF rarely explicitly criticizes wealthy developed countries, which are often helpful allies.
In 2010, the Cameron Clegg coalition government pursued an austerity program (spending cuts and tax increases), at least initially with public support from the IMF.
In September 2022, the IMF warned Liz Truss’ government that unfunded tax cuts were reckless and risked raising prices and fueling inflation.
It would be a mistake to think that IMF intervention brought down Liz Truss, but it certainly contributed to her diminished credibility.
Mr Hunt has been under pressure for some time from members of his own party to cut taxes, particularly as the latest opinion polls suggest the Conservatives face a clear prospect of defeat. The temptation to cut taxes in an election year will be strong.
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According to the Office for Budget Responsibility, Britain’s tax burden (the amount of tax paid as a percentage of national income) is expected to reach a post-war record high of 38% of GDP.
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 caused by Russia’s invasion of Ukraine. They did it using debt.
The country’s debt stock is increasing, the cost of servicing it is increasing (in line with inflation and interest rates), and the outlook for economic growth (and therefore tax revenues) is weak.
Despite this, the Chancellor cut the main National Insurance tax rate by 2 percentage points in January, suggesting further action is on the way.
In recent months, the main drag on inflation has faded, and markets are starting to bet that the Bank of England will consider cutting interest rates soon.
In theory, Mr Hunt’s self-imposed “borrowing rules” – which include a target of reducing debt as a percentage of gross domestic product (GDP) in five years’ time – should give his budget some leeway. It means that there is.
However, the Institute for Fiscal Studies (IFS) has warned that any tax cuts in the run-up to the general election are likely to be temporary, especially as the government’s current spending plans are, in its view, unrealistic. ing.
The IFS last week estimated that “unprotected” government sectors will face a £20bn annual funding gap from 2024/25 onwards.
The IMF shares the view that reducing spending on public services is “very difficult” and therefore assumes that cuts will not materialize.
“January’s tax cuts were essentially financed by curbs on future public service spending plans that may not be realized,” IFS’ Carl Emerson said in response to the IMF’s comments.
“And government debt is expected to remain high for years to come. Therefore, the economic case for further tax cuts before a detailed spending review is weak to say the least.”
In response to the IMF’s comments, Mr Hunt said: “The IMF expects growth to strengthen in the coming years, supported by the introduction of one of the world’s largest capital investment tax breaks, alongside national insurance cuts to improve labor incentives.” Ta.
“While it is too early to know whether further tax cuts are possible within the budget, we continue to believe that prudent tax cuts can have a significant impact on boosting growth.”
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