The International Monetary Fund has signalled its opposition to pre-election tax cuts from Jeremy Hunt as it warned the government of a looming £30bn hole in the UK’s public finances.
In its annual health check on the economy, the Washington-based IMF said current spending plans looked unrealistically low and that “difficult choices” lay ahead.
The IMF said it would have advised Hunt not to cut national insurance contributions (NICs) by two percentage points in last year’s autumn statement and March budget, and expressed strong doubts about the wisdom of the chancellor’s reported plans for a third cut in NICs before polling day.
It said that, in order to stop debt rising, the Treasury may need to consider a range of potentially unpopular revenue-raising measures including widening the scope of VAT, road pricing, scrapping the triple lock on the state pension and wider user charges for public services.
The IMF said the economy was on course for a “soft landing” after a faster-than-expected fall in the annual inflation rate and the end of last year’s shallow recession. It believes the UK will grow by 0.7% this year rather than the 0.5% it had estimated in last month’s World Economic Outlook.
With the Bank of England contemplating whether to cut interest rates next month from their current 5.25%, the Fund said it saw scope for two or three 0.25 percentage point cuts in official borrowing costs this year.
But it said the longer-term growth prospects for the economy remained poor and that this – coupled with demands for better public services and “critical investment needs” – put pressure on the public finances.
A team of IMF officials has been in the UK for the past two weeks for the annual Article IV consultation and said in a concluding statement: “In light of the medium-term fiscal challenge, staff would have recommended against the NIC rate cuts, given their significant cost.
“But staff does recognise the potential labour supply benefits of the NIC cuts and that they were accompanied by well-conceived measures (eg reform of the ‘non-dom’ regime) that will partially offset their fiscal cost over the medium term.”
The statement said that “as a general principle, staff would advise against additional tax cuts, unless they are credibly growth-enhancing and appropriately offset by high-quality deficit-reducing measures”.
Government plans involve day-to-day departmental spending rising by 1% a year when adjusted for inflation, and for investment spending to be flat. The IMF said these did not “sufficiently account for known pressures in public services (especially health and social care), and critical growth-enhancing investment needs (including for the green transition)”.
The IMF team said it was assuming higher increases – 2% real growth – in departmental spending, but that this would result in debt as a share of national income continuing to rise, reaching 97% of gross domestic product by the end of the decade.
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The IMF said that, to be certain of stabilising debt by 2029-30, the government would need to raise revenue or make savings equivalent to one percentage point of GDP – roughly £30bn – and that this would involve “tough choices”.
It said: “This could be achieved, for example, by raising additional revenue from higher carbon and road-usage taxation, broadening the VAT and inheritance tax bases, and reforming capital gains and property taxation (which could also allow a reduction in stamp duty), broadly echoing the 2023 Article IV recommendations.
“On the spending side, staff continues to recommend indexing the state pension (only) to cost of living increases, recognising the authorities’ efforts to contain the non-pension welfare bill by incentivising work.”
It said other options might include expanded use of charges for public services, as well as pursuing productivity gains, such as from the government’s announced investment in digitalisation and AI within the public sectorincluding in the NHS.
Hunt said: “Today’s report clearly shows that independent international economists agree that the UK economy has turned a corner and is on course for a soft landing.
“The IMF have upgraded our growth for this year and forecast we will grow faster than any other large European country over the next six years – so it is time to shake off some of the unjustified pessimism about our prospects.”