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IMF urges Rachel Reeves to raise taxes and rein in spending to stabilise UK public finances

by October 16, 2024
October 16, 2024
IMF urges Rachel Reeves to raise taxes and rein in spending to stabilise UK public finances

The International Monetary Fund (IMF) has called on Chancellor Rachel Reeves to introduce tax increases and tighten government spending in the upcoming budget, warning that delaying such measures could exacerbate the UK’s public finance problems.

In a pre-released section of its *Fiscal Monitor* report, the Washington-based organisation highlighted the UK and the United States as countries where borrowing rates have surged beyond pre-pandemic levels, raising concerns about the sustainability of their national debts.

“With debt risks elevated in most countries and debt growing at a faster pace than in the pre-pandemic years in large countries (United Kingdom, United States), postponing adjustments would only make the required correction larger,” the IMF warned.

Reeves is expected to announce a series of tax hikes during her first budget on 30 October, with potential changes such as subjecting employers’ pension contributions to national insurance and raising capital gains tax rates. Both she and Labour leader Sir Keir Starmer have emphasised the need for “tough decisions” to bring the public finances under control, although they have also committed to increasing public sector investment to drive economic growth.

Labour claims to have inherited a £22 billion shortfall in public finances from the previous Conservative administration, a figure compounded by existing fiscal plans set by former chancellor Jeremy Hunt. These plans include £20 billion in real-terms budget cuts for unprotected government departments.

According to estimates from the Institute for Fiscal Studies (IFS), taxes need to rise by £25 billion annually to avoid a return to austerity, which Labour has pledged to prevent.

The IMF estimates that global debt is set to exceed $100 trillion (93% of global GDP) this year, criticising governments for failing to take control of their public finances. It highlighted that fiscal policies have increasingly leaned towards higher government spending, contributing to greater fiscal policy uncertainty and more entrenched political resistance to tax increases.

Labour, in its election manifesto, ruled out raising key revenue-generating taxes like income tax, national insurance, and VAT, which together account for 75% of public income. However, the IMF pointed to rising spending pressures from the green transition, an ageing population, and security needs as growing challenges for governments worldwide.

This call from the IMF comes as developed nations, including the US and France, grapple with ballooning deficits. The US is projected to run a $1.8 trillion deficit this year, partly due to subsidies from the Inflation Reduction Act. France, which faces a deficit of around 6% of GDP, recently introduced a budget featuring £60 billion in tax hikes and spending cuts to tackle its debt.

The IMF stressed that there is a strong case for fiscal policies to focus on debt sustainability and rebuilding fiscal buffers “now rather than later.”

In response to the IMF’s warning, a Treasury spokesperson said: “The government has been honest about the scale of the challenge we have inherited from the previous administration, including a £22 billion black hole in the public finances. The budget will be built on the rock of economic stability, including robust fiscal rules that were set out in the manifesto. This includes moving the current budget into balance, so that day-to-day costs are met by revenues, and debt falling as a share of the economy by the fifth year.”

With Reeves’ budget looming, it is clear that the balancing act between addressing the fiscal challenges and stimulating growth will shape the direction of the UK’s economic policy in the months and years ahead.

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IMF urges Rachel Reeves to raise taxes and rein in spending to stabilise UK public finances

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