The International Monetary Fund [IMF] has issued a statement urging the UK government to reconsider implementing large-scale tax cuts.
The IMF suggests that this move could widen the inequality cap, further fuel inflation and see fiscal policy end up at loggerheads with monetary policy.
The statement reads: “We understand that the sizeable fiscal package announced aims at helping families and businesses deal with the energy shock and at boosting growth via tax cuts and supply measures.
“However, given elevated inflation pressures in many countries, including the UK, we do not recommend large and untargeted fiscal packages at this juncture, as it is important that fiscal policy does not work at cross purposes to monetary policy.
“Furthermore, the nature of the UK measures will likely increase inequality.”
Following the announcement of chancellor Kwasi Kwarteng’s mini-Budget on Friday, the pound has plummeted early this week as the markets responded adversely.
The pound sterling plunged to an all-time low of $1.03 against the US dollar in the early hours of Monday. It later recovered some ground before dropping back by 0.7 per cent to $1.06 after the IMF issued its statement.
Ministers insist that their plans will stimulate economic growth, while Lord Frost, a key ally of the prime minister Liz Truss, was disappointed by what he said was an “overreaction” from the markets.
He also hit out at the IMF statement, telling the Daily Telegraph: “The IMF has consistently advocated highly conventional economic policies. It is following this approach that has produced years of slow growth and weak productivity.
“The only way forward for Britain is lower taxes, spending restraint, and significant economic reform.”
The Treasury has also insisted that it is “focused on growing the economy” in order to “raise living standards for everyone.”
Nevertheless, the tax cuts announced by Kwarteng have raised concerns that interest rates could soar even higher, at a time when the government wants to increase borrowing.
Indeed, some lenders have temporarily halted offering out new mortgage deals given the uncertainty around where interest rates stand.
While the IMF acknowledged that the UK government’s plan came with growth in mind, it was clear in its concern that government fiscal policy could come at odds with the Bank of England’s monetary policies.
Speaking to the BBC, the IMF’s former deputy director Adnan Mazarei highlighted that it was not conventional for the IMF to issue such strong statements on the economies of G7 nations and it was likely alarmed by a possible dissonance between the government and the Bank.
Mazarei hinted that the IMF was worried by the possible permanency of the tax cuts announced on Friday and government plans to finance these through excessive borrowing.
With the markets responding and the pound falling in value, Mazarei explained that it was a certainty that the Bank would increase interest rates in response, and a difficult economic situation would intensify as policies clashed.
He added: “There is also a sense of problems in the country's economic management and their ability to handle issues, which could lead to problems of inflation [and] financial market difficulties... for example we've seen problems in the mortgage markets which will hurt the UK household.”
The Bank of England has indicated that it is prepared to hike interest rates further to halt the fall of the pound, with chief economist Huw Pill saying a “significant monetary policy response” would be mounted to preserve its value as much as possible.
The government is set to publish a fiscal plan on November 23 which will set out in more detail how it plans to finance the mini-Budget package and ensure that UK debt falls as a percentage of economic output in the medium term.
The IMF urged ministers to seize upon this as an “early opportunity” to “re-evaluate” large-scale tax cuts, “especially those that benefit high income earners.”
Part of the mini-Budget saw Kwarteng abolish the top 45 per cent rate of income tax on earnings over £150,000 per year and lift the cap on bankers’ bonuses. This move has come under major criticism by opposition MPs at this week’s Labour Party Conference.
Labour shadow chancellor Rachel Reeves said that the IMF statement ought to “set alarm bells ringing in government” and prompt an immediate rethink.
She urged ministers to “urgently” outline how it will “fix the problems it created through its reckless decisions to waste money in an untargeted cut in the top rate of tax”.
Reeves added: “Waiting until November (23) is not an option. The government must urgently review the plans made in their fiscal statement last week.”
Meanwhile, Labour leader Sir Keir Starmer accused the Tory government of "losing control of the economy", adding that they can "never again claim to be a party of fiscal responsibility."
Photo by Christopher Bill on Unsplash
