IMF cautions against UK cutting taxes in upcoming Budget

The UK government shouldn’t cut taxes in the budget because it needs the money to invest in public services and get the national debt under control, the International Monetary Fund said.

The intervention from the Washington-based institution comes just over a month before Jeremy Hunt unveils what could be the last major fiscal event before a national election likely to be held later this year. 

With the ruling Conservative Party trailing far behind Labour in opinion polls, the chancellor is expected to announce a series of tax cuts in a bid to win over voters.

“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. “Accommodating these needs, while stabilizing the debt to GDP ratio, will already require additional fiscal savings, including on the tax side. It is in this context that staff advises against further tax cuts.”

In its World Economic Outlook Update published Tuesday, the IMF forecasts the UK will grow 0.6% this year and 1.6% in 2025. Across the two years, the UK performs better than Germany, Japan and Italy among major advanced economies but behind the US, Canada and France. 

The projections assume the Bank of England delivers two quarter-point cuts in the second half of the year, taking interest rates to 4.75%, the spokesperson said. Hunt said he’s still considering what measures to put into his budget.

“It is too early to know whether further reductions in tax will be affordable in the budget,” Hunt said in a statement. “But we continue to believe that smart tax reductions can make a big difference in boosting growth. The IMF expect growth to strengthen over the next few years, supported by our introduction of the biggest capital investment tax reliefs anywhere in the world, alongside National Insurance cuts to improve work incentives.”

The IMF last intervened in UK government policy in September 2022, when it openly criticized then-Prime Minister Liz Truss’s disastrous mini-budget that triggered turmoil on financial markets. Relations have improved under Rishi Sunak, who reversed most of the unfunded tax cuts proposed by Truss, but the fund’s latest stance places it at odds with the government’s clear ambition.

Rather than cut taxes, the spokesperson said, the UK should be raising them: “The IMF has recommended strengthening carbon and property taxation, eliminating loopholes in wealth and income taxation, and reforming the pensions triple lock,” a commitment to increase the state pension each year by a minimum of 2.5%.

Economists have warned that current spending plans are undeliverable because they imply deep real-terms cuts for departments that are already struggling after years of austerity. Last week, the chair of the Office for Budget Responsibility highlighted the longer-term pressures on the public finances from an aging population.