IMF Warns Treasury Against Tax Cuts Ahead of Spring Budget

An exterior view of the building of the International Monetary Fund is seen on in Washington, DC. March 27, 2020. (Photo by Oliver Douliery/AFP via Getty Images)

The International Monetary Fund (IMF) has warned that Britain cannot afford to cut taxes because it needs the money to preserve services and bring down the national debt.

The organisation, comprised of 190 members countries, has published its economic outlook update on Tuesday. Commenting on the state of the economic growth in the UK, the IMF predicted a “moderate” rise to 0.6 percent this year.

Next year’s projection showed a growth of 1.6 percent, placing Britain at the bottom of the G7 major economies, next to Germany and only ahead of Japan.

The UK is said to be recovering slowly from the negative effects of high energy prices and persistent high inflation, which have stopped the government from announcing tax cuts in the past.

Although Chancellor Jeremy Hunt has previously signalled the readiness to slash taxes in the spring budget, the IMF has advised against the move.

“Preserving high-quality public services and undertaking critical public investments to boost growth and achieve the net zero targets, will imply higher spending needs over the medium term than are currently reflected in the government’s budget plans,” an IMF spokesperson said.

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The financial agency suggested that it would take “high-quality fiscal savings, including on the tax side,” to accommodate Britain’s higher spending needs and the need to secure a stable debt/DGP ratio.

“It is in this context that [IMF] staff advises against further tax cuts,” the IMF said.

The agency’s chief economist, Pierre Olivier-Gourinchas, listed a number of public spending sectors that need to be considered. This includes health care, social care, education, the UK’s net zero transition and economic growth.

Between a Rock and a Hard Place

The UK’s public sector net debt was £2.68 trillion at the end of Dec. 2023, or around  97.7 percent of GDP. It remained at levels last seen in the early 1960s.

Borrowing in the financial year-to-December 2023 was £119.1 billion, which was £5.0 billion lower than forecasted by the Office for Budget Responsibility (OBR). A lower than expected borrowing figure could provide Chancellor Jeremy Hunt with the opportunity to slash taxes in March.

“It is too early to know whether further reductions in tax will be affordable in the Budget, but we continue to believe that smart tax reductions can make a big difference in boosting growth,” Mr. Hunt said on Tuesday.

In its ambition to cut taxes in the election year, the government finds itself between a rock and a hard place. On one hand, slashing taxes could prove critical for the Conservative party to increase its poll ratings. On the other hand, tax relief would mean going against the advice of a respected global economic institute, such as the IMF.

In a report by the Institute for Fiscal Studies (IFS), published last week, the think tank also warned against tax cuts.

“It might be easy to announce immediate tax cuts, without any hint of what it is the state currently does that it will stop doing, or what taxes will rise in future, but this trade-off cannot be wished away,” the IFS said.

The IFS report suggested that whoever in Westminster inherits the current state of the economy will face “a combination of high debt interest payments and low growth.”

Labour has criticised the government for the thorny inheritance of “high debt, flatlining growth, high taxes and working people worse off.”

The Treasury, however, has argued that it succeeded in halving inflation and ensuring that debt falls as a share of the economy. This means that “we are now beginning to turn a corner,” a Treasury spokesperson said.

The recent easing of inflation has allowed Mr. Hunt to provide some tax cuts. The Autumn Statement announced a 2p cut to National Insurance and a tax cut on business investment.

Cutting taxes “responsibly” and repairing public finances will be the Tories’ “stall come the election,” said the chancellor.