IMF warns UK government of further tax cuts

The International Monetary Fund (IMF) has advised the UK against further tax cuts as it releases its latest assessment of the global economy.

He said maintaining public services and investment would require greater spending than reflected in the government's current plans.

The IMF has suggested that the spending cuts planned by the Treasury starting this year are unrealistic.

Treasurer Jeremy Hunt said tax cuts could go a long way in boosting growth.

Mr Hunt has strongly hinted at further tax cuts in his next Budget in March.

The IMF is an international organization with 190 member countries including the UK. They work together to stabilize the global economy.

One of the foundation's jobs is to advise its members on how to improve the economy.

The IMF's latest comments come as it lowers its UK growth forecast for next year from 2% to 1.6%, due in part to the statistical consequences of upward revisions to growth during the pandemic. This increased performance leaves less room for growth to catch up in later years.

The UK's growth rate is expected to remain sluggish, at less than 0.5% and 0.6% last year and 0.6%, respectively, making it the second slowest of the Group of Seven (G7) economies, after Germany.

The IMF also assumes that the Bank of England will cut interest rates less than financial markets, estimating that interest rates will remain at 5.25% in the first half of this year. The central bank is then expected to cut it by 0.5% in the second half of this year.

Treasury officials say the government has tapped the IMF for advice on tax cuts, which is based on the IMF's findings for its annual detailed health review of the UK economy.

It comes at a sensitive time, ahead of a budget and general election, when the prime minister hopes to cut key lines with opposition parties in smaller states by cutting public spending and cutting taxes. Treasury officials said the improvement in Britain's growth prospects came thanks to the Chancellor's targeted business investment tax cuts.

On Tuesday, Mr Hunt will receive the first draft of fiscal figures from the Government's independent forecasting body, the Office for Budget Responsibility (OBR), including hints at room for maneuver that could be used to cut taxes or increase spending.

OBR chief Richard Hughes recently said it was “generous” to describe the government's penciled-in post-election spending plans as “fiction”, but said it did not mean “the government has gone to the trouble of writing individual departmental plans. “I don't even write it down,” he says.

If the government sticks to its spending plans, lower interest rates and a stronger economy could give the chancellor up to £20bn a year more room to maneuver around self-imposed borrowing targets.

Commenting on the IMF's advice, Mr Hunt said: “The IMF expects growth to strengthen in the coming years, supported by the world's largest investment tax cut and the introduction of national insurance cuts to boost incentives for work.'' ”

“While it is too early to know whether further tax cuts are possible within the budget, we continue to believe that prudent tax cuts can have a significant impact on boosting growth.”

The IMF and the UK government are at odds over previous forecasts. In October last year, the IMF rejected the government's proposal, saying at the time its assessment of Britain was too bleak.

But economic forecasters aren't always right when it comes to predicting the future. The IMF has previously said its projections for most advanced economies, such as the UK, are often within about 1.5 percentage points of what is actually happening.

Elsewhere, the IMF predicted that the global economy could be on a path to a “soft landing” with lower inflation and more resilient growth.

It now expects growth to be 3.1% this year, instead of the 2.9% it predicted in October, due to the resilience of the United States and the strong performance of developing countries such as Mexico and India.

Growth forecasts for Russia have been revised particularly sharply upwards, with growth now expected to grow by 2.6% this year, compared to an earlier forecast of 1.1%. The expansion came despite sanctions the country faces after the invasion of Ukraine, as high military spending fuels growth.

China grew 5.2% last year and is expected to grow less this year, although the IMF's outlook for the country has brightened since October. Currently, growth is expected to be 4.6%.

But the IMF warned that much depended on the deeply troubled real estate sector and how much support they could get from the Chinese government.

The IMF said tensions in the Middle East were also a major concern. The report said recent attacks on commercial ships in the Red Sea and the ongoing war in Ukraine could damage global trade.

Amid these challenges, the IMF called on the world's central banks to focus on price stability.

The central bank has been raising interest rates over the last year to slow inflation, the pace at which prices rise.

The IMF said it expects global inflation to fall to 5.8% this year from 6.8% last year, with developed countries seeing the biggest decline.

The group said that as well as higher interest rates, lower energy prices would also help curb inflation. He expressed the view that this would make it easier for companies to hire new personnel and slow wage growth, which would also help ease price increases.