IMF warns UK government against potential tax cuts

January 31, 2024

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IMF warns UK government against potential tax cuts

The International Monetary Fund has recently advised the UK against further tax cuts, as it launched its latest assessment of the world economy.

It said preserving public services and investment implied higher spending than was reflected in the government's current plans. The IMF suggested the Treasury's pencilled-in spending cuts from this year were unrealistic at best.

The UK Chancellor, Jeremy Hunt, said tax cuts could be a big help in boosting growth and most recently he has hinted heavily about more tax cuts in his upcoming Budget in March of this year.

One of the IMF’s key tasks is to advise its members on how to improve their economies. The latest comments from the IMF came as it downgraded its forecasts for UK growth next year from 2% to 1.6%, partly as a statistical result of growth having been revised higher during the pandemic years. This better performance leaves less room for growth to catch up in later years which is now being observed in 2024.

The UK's growth last year and this year is expected to remain sluggish at below 0.5% and 0.6% respectively, the second-slowest in the G7 major economies, behind Germany which has also encountered recent economic trouble.

The IMF also assumes fewer Bank of England rate cuts than in financial markets, therefore calculating that rates will remain at 5.25% in the first half of this year. The Bank is then expected to cut by half a per cent over the second half of the year.

Treasury sources stated the government was slapping down the IMF for its advice on tax cuts, which derives from the organisation's research for its annual in-depth health check of the UK economy.

It comes at a key time ahead of the upcoming Budget and a general election where the chancellor hopes to define key points with the opposition on a smaller state, with lower public spending and lower taxes. The Treasury sources said that the improvement in UK growth prospects arose because of the chancellor's targeted business investment tax cuts.

If the government looks to remain close to its current spending plans, then lower interest rates, and a stronger economy could increase the chancellor's room for manoeuvre against his self-imposed borrowing targets by as much as £20bn per year.

In news related to the rest of the World, the IMF predicted that the world economy could be on the path to a "soft landing" with lower inflation and more resilient growth.

It now predicts a revised growth of 3.1% this year, rather than the 2.9% it predicted in October, because of the resilience of the US and a strong performance from developing economies such as Mexico and India.

IMF revises global outlook for the World Economy in its most recent reports

The IMF has now predicted that the world economy could be on the path to a "soft landing" with lower inflation and more resilient growth.

It now states a revised growth of 3.1% this year, rather than the 2.9% it predicted in October, because of the resilience of the US and a strong performance from developing economies such as Mexico and India.

There was a notably large upgrade to its forecast for growth in Russia, which is now expected to expand 2.6% this year, ahead of the earlier 1.1% prediction. The expansion comes despite sanctions facing the country after its invasion of Ukraine, as high military spending continues to boost growth as a result.

The Chinese economy grew 5.2% last year and while it is not expected to perform as well this year, the IMF's outlook on the country has brightened since its economic woes in October. It is now forecasting growth of 4.6%.

However, the IMF cautioned that much relies on its deeply troubled property sector and how much support it gets from the stretched Chinese government. This week's ordered liquidation of property giant Evergrande with $300bn (£236bn) of debt shows the scale of the problems it is now causing.

Ongoing tension in the Middle East represents another significant cause for concern, the IMF recently stated. It said recent attacks on commercial shipping in the Red Sea and the ongoing war in Ukraine could damage global trade.

Amid these challenges, the IMF urged the world's central banks to focus on stabilising prices. Over the last year central banks have increased interest rates to try to slow inflation, the pace at which prices are rising.

The IMF said it expected global inflation to fall from 6.8% last year to 5.8% this year, with advanced economies seeing the biggest drops.

As well as the growing growth in wage rates, the organisation said lower energy prices would help to drive down inflation. It said slower wage growth, as companies find it easier to recruit new staff, would also help to ease price rises.

US economy surprises with faster than expected growth

The US economy grew faster than expected in the final months of last year, driven by robust household and government spending.

The world's largest economy expanded at an annual rate of 3.3% over the three months to December, the Commerce Department announced in a recent statement. That was down from 4.9% in the prior quarter, but a much faster value than the 2% many analysts had expected.

Throughout 2023, the economy grew at an annual rate of 2.5%, up from 1.9% in 2022. The figures cap a year that has been characterised by unexpected economic resilience, even as the US central bank raised borrowing costs sharply and inflation cooled.

The figures are a welcome sight  for US President Joe Biden, who has struggled to convince the general public that the economy remains healthy, as it downshifts from the apparent boom after the pandemic and in recent months, surveys have shown consumer sentiment improving. The stock market is up, petrol prices are down and unemployment remains low.

While the jump in prices since 2019 remains a sticking point for voters, the inflation rate has also eased, falling to 3.4% in December, after soaring to more than 9% in 2022.

Many economists had expected households to cut back spending as prices eroded their budgets and for business activity to cool in the face of more expensive borrowing costs, warning of the risks of a downturn, or recession.

But that scenario has not materialised, as high savings left over from the pandemic, an uptick in wage growth, and other government spending provided a cushion. Compared with the fourth quarter of 2022, the US economy grew 3.1%.

On Wall Street, the improving picture has led to speculation that the Federal Reserve, which raised interest rates sharply to fight inflation, might start to reverse course.

But analysts said the strength of the economy portrayed in the report on gross domestic product (GDP) will relieve pressure on the bank to act quickly.

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