The International Monetary Fund warned the UK government on Tuesday that the country is on track to meet its debt target and that it should not cut taxes before an election this year, with tax rises likely to be needed in the future.
The International Monetary Fund raised its forecast for British economic growth in 2024 to 0.7% from its April forecast of 0.5%, an increase that reflects strong growth data from early 2024 and will be welcomed by Prime Minister Rishi Sunak, who is struggling to win over voters.
However, its annual report on the UK economy also criticized the Sunak government’s policies, in particular recent tax cuts in the form of lower contributions to social security.
The IMF said the Bank of England should cut interest rates two or perhaps three times this year, by 0.25 percentage points each time, although it expects inflation will only return to the central bank’s target on a permanent basis at the start of 2025.
The UK is expected to see a “soft landing” after a short, superficial recession in the second half of 2023, the Fund said.
Finance Minister Jeremy Hunt focused on improving the immediate economic outlook, saying the International Monetary Fund agreed with his recent comments that the British economy has turned a corner.
“It is time to rid ourselves of some unjustified pessimism about our prospects,” he said in a statement.
But the Fund said growth would still creep and debt was set to rise. He expected net public sector debt, excluding the Bank of England’s bond purchase programme, to reach 97% of GDP in the 2028/29 financial year.
“We are really concerned, not just for the UK but for all countries that have used financial reserves extensively, that they need to do more to rebuild those reserves,” Kristalina Georgieva, Executive Director of the International Monetary Fund, said at a press conference.
In March, the UK’s budget watchdog said the government was on track to meet its target of reducing debt as a share of GDP in the final year of its five-year forecast horizon, albeit just barely.
The Fund said it expects more spending in the future than expected in the UK, and that the UK needs to tighten its belt – by raising taxes or cutting spending – at an average of about one percentage point of GDP, or roughly 30 percent. One billion pounds ($38 billion) annually. The year to stabilize debt until the end of the decade.
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