As the United Kingdom navigates its fiscal path, the International Monetary Fund has chimed in with some crucial advice. Buckle up, because the IMF isn’t mincing words: no more tax cuts for the UK this year. Why? The funds are better off funneled into public services and fostering investments that are growth-oriented. This isn’t just a casual suggestion; it’s a strategic maneuver to bolster the national budget.
Pierre-Olivier Gourinchas, the IMF’s chief economist, was forthright during a recent press briefing. The UK, along with several other countries, faces the challenge of accommodating a significant uptick in spending pressures. What’s on the UK’s shopping list? Think National Health Service, social care, education, and the crucial transition to a greener economy. Plus, there’s the need to spur growth without letting debt levels skyrocket.
Fiscal Responsibility Amidst Growth Aspirations
The IMF’s stance is clear: discretionary tax cuts, which are currently under discussion, get a thumbs down. An IMF spokesperson further elaborated that the UK’s public services and investment needs are more substantial than what’s currently reflected in the government’s budget plans. The IMF’s laundry list for the UK includes beefing up taxes on carbon emissions and property, sealing loopholes in wealth and income taxation, and tweaking pension rules.
British Finance Minister Jeremy Hunt is set to unveil his latest budget in early March, right before the general election. The timing couldn’t be more crucial. With the Conservative government needing to call an election this year and Labour leading in most polls, the stakes are high. Hunt’s previous budget in fall saw several tax cuts, and he’s hinted at more in the spring.
The UK’s public sector net borrowing tells a story of recovery. December 2023 saw borrowing at roughly half of the previous year’s level, thanks to higher VAT and income tax receipts, coupled with lower spending. The IMF’s forecast is a mixed bag, predicting a modest 0.6% growth for the UK economy this year, a slight uptick from 2023’s estimated 0.5%. However, the forecast for 2025 is toned down to 1.6%.
Taxation and Growth: A Balancing Act
The IMF’s advice echoes a broader economic perspective. Gourinchas told CNBC that despite a subdued growth outlook for the year, the UK has positive news on the inflation front, projected to average 2.8%. The Bank of England, like its counterparts in the U.S. and Europe, is expected to ease policy rates as inflation targets are met.
However, the IMF warns UK chancellor Jeremy Hunt against tax cuts. The country’s focus should be on fiscal consolidation, despite expectations of tax cuts in Hunt’s spring Budget. Gourinchas emphasized rebuilding fiscal buffers in the face of pressing spending needs, rather than pursuing a £20 billion cut in personal and business taxes delivered last November.
The IMF’s predictions for the UK economy are cautious, with a tepid 0.6% expansion in 2024, barely outpacing the 2023 rate. UK GDP growth is expected to pick up to 1.6% in 2025. Amidst this, Hunt and Prime Minister Rishi Sunak have fueled expectations of tax reductions in the upcoming March 6 Budget, ostensibly to bolster the Conservatives’ polling figures.
Last summer, the IMF advised that the Treasury would likely need to increase spending more than anticipated to maintain quality public services and invest in green initiatives. This implies a need for stronger carbon and property taxation and closing loopholes in wealth and income taxes.
Jeremy Hunt has, however, dismissed the IMF’s tax policy recommendations. He cites the IMF’s growth expectations, supported by significant capital investment tax reliefs and national insurance cuts. The decision on further tax reductions in the Budget remains uncertain, but Hunt believes that smart tax cuts can significantly boost growth.
The UK’s underlying public debt as a GDP percentage is expected to rise before gradually decreasing over the next half-decade. Hunt’s scope for tax cuts largely depends on the “fiscal headroom” he has to adhere to his fiscal rule of reducing public debt as a GDP share in five years.
Richard Hughes, chair of the Office for Budget Responsibility, notes that the £13 billion budget headroom is vulnerable to interest rate changes and data revisions. Treasury internal estimates suggest that the headroom for the March Budget might not significantly deviate from these figures, leaving Hunt with limited room for tax cuts while meeting fiscal targets.
The IMF emphasizes the UK’s progress toward lower inflation, with consumer price inflation recently at 4%. Globally, the IMF notes that inflation is dropping faster than expected, potentially facilitating a soft landing for the global economy. However, it advises against immediate rate cuts to decisively quash inflation. The Bank of England is expected to maintain its policy interest rate, with potential cuts in the latter half of the year.
Globally, the IMF has upgraded its growth forecasts, yet the advice to the UK remains firm: prioritize spending on essential services and climate change initiatives while navigating the path of fiscal consolidation and growth.
