IMF urges fiscal discipline as elections loom around world
The International Monetary Fund has issued a strong warning to Britain and other countries facing elections this year to avoid voter giveaways that might pose risks to public finances.
In its half-yearly fiscal monitor, the IMF said the reduction in national insurance contributions announced by Jeremy Hunt in his budget last month may have already made cutting the UK’s national debt more difficult. There is speculation Hunt may announce further tax cuts ahead of an autumn election but the fiscal monitor makes it clear this would be against the advice of IMF officials.
The Washington-based fund’s analysis showed the national debt as a share of the economy’s annual output – the debt-to-GDP ratio – rising steadily in every year between now and the end of the 2020s – from 92.9% in 2024 to 98% in 2029.
The IMF said the decision to spend £10bn on a 2% reduction in national insurance was “significant” and, while in part funded by “well conceived” tax increases, “could worsen the debt trajectory in the medium term”.
Hunt said he was able to cut taxes without breaking his rules for the public finances because the independent Office for Budget Responsibility was pencilling in a small drop in the UK’s debt-to-GDP ratio in the fifth year of its forecast.
Responding to the IMF’s warning, the chancellor defended his decision to cut national insurance by 2% in last month’s budget.
“The IMF have recognised and given credit to the government for the difficult decisions we have taken to get the public finances in order, he told reporters in Washington last night. “It was possible to make significant tax cuts in a responsible way that doesn’t increase borrowing.”
The OBR calculates its debt figures in a slightly different way to the IMF but both organisations say there has been a marked deterioration as a result of the support provided by the government to the economy during the coronavirus pandemic and after Russia’s invasion of Ukraine.
In a blog accompanying the fiscal monitor, IMF officials said that, rather than contemplating tax cuts, most governments should instead be focused on rebuilding their public finances.