The International Monetary Fund (IMF) has advised the UK against further tax cuts as it released its latest assessment of the global economy. The IMF warned that maintaining public services and investment would require higher spending than currently planned by the UK government. It also suggested that the Treasury’s proposed spending cuts for this year were unrealistic.
Despite Chancellor Jeremy Hunt’s assertion that tax cuts could boost growth, the IMF’s caution comes as the organization downgraded its UK growth forecast for next year from 2% to 1.6%. The UK’s growth remains sluggish, with projections below 0.5% for last year and 0.6% for this year, making it the second slowest in the G7, just ahead of Germany.
The IMF also expects fewer interest rate cuts from the Bank of England than financial markets have anticipated, predicting that rates will remain at 5.25% in the first half of this year, with a slight reduction in the second half.
As the UK government prepares its upcoming Budget, tensions have risen between the Treasury and the IMF. Treasury sources criticized the IMF’s advice on tax cuts, which stemmed from its in-depth analysis of the UK economy. This clash occurs at a politically sensitive time, with the chancellor aiming to distinguish his party’s economic policies ahead of the general election.
The IMF’s warnings align with recent statements from the Institute for Fiscal Studies (IFS), which indicated that promises of tax cuts during the election campaign might need to be retracted due to the UK’s ongoing economic struggles.
Globally, the IMF noted that the world economy might be on a path to a “soft landing,” with lower inflation and more resilient growth expected this year. However, challenges such as tensions in the Middle East, the ongoing war in Ukraine, and China’s troubled property sector pose significant risks. The IMF urged central banks worldwide to focus on stabilizing prices amid these uncertainties.