IMF urges benefits cuts to lift workforce rates
Rich nations have been urged by the International Monetary Fund (IMF) to cut benefits and taxes to tackle the worklessness crisis. Britain’s Work and Pensions Secretary Mel Stride vowed to “do whatever it takes to get Britain working” as the IMF said men in particular would be encouraged to find jobs if countries lowered taxes and benefits. More training and childcare support would help more women into work, the organisation said.
The IMF research, which was based on analysis of 38 OECD industrialised economies, including the UK, United States and Germany, said higher pension ages would also keep people in work for longer.
The comments are likely to fuel the debate among British Conservative MPs over the benefits reform needed to boost work.
Stride said “the most radical welfare reforms in a decade” would help end the scourge of worklessness holding the UK back.
“While our inactivity rate is lower than many economic heavy weights including the USA, France and Italy, our tax cuts and welfare reforms will grow the labour force by 300,000 people – growing the economy and changing lives.”
It comes amid fears that Britain is being held back by the 9.25 million adults of working age who are economically inactive – neither in work nor looking for work.
Of these, 2.7m are long-term sick, 2.6m are students, 1.6m are looking after their home or family and 1.1m have taken early retirement.
Other developed nations face a similar situation. The IMF warned that the world faced a dire slump in economic growth as a result without radical action to boost productivity.
“Reduced unemployment benefits and lower labour taxes are associated with higher participation for men of prime working age,” the IMF said in its World Economic Outlook.
“For women, an expansion in secondary education enrolment has a positive association with future participation rates. Similarly, labour market programmes (such as retraining and reskilling) and childcare programmes appear to be supportive.”
Former Tory leader Sir Iain Duncan Smith urged British Prime Minister Rishi Sunak to focus on tackling the sickness benefits bill.
“We need to say to these people: you’ve got to go to work. And we will help and support you if you have particular conditions.”
Duncan Smith said supporting people signed off work with depression and anxiety accounted for an increasing share of the benefits bill. “These are very treatable conditions, and part of that treatment is ... supporting them into work.”
Last month Stride unveiled plans to make 150,000 people off work with mild mental health problems look for jobs, warning that the “normal ups and downs of human life” risked being labelled as a medical condition.
Duncan Smith said it was also vital to “bring the overall burden of tax down” by cutting income tax. He said: “That’s where people notice it on their payslips and find it more rational to do longer hours.”
Global GDP growth was on course to slow to just 2.8% a year at the end of the decade, the IMF said, which is about a quarter slower than the pre-pandemic average. In the UK, growth is not expected to be sustained above 2% for any meaningful period.
This threatens painful consequences for governments that are already struggling with mounting debts and pressure to spend more on pensions and healthcare.
Critical to boosting growth and prosperity is getting more people into work and ensuring they move into the most productive industries and companies.
As well as encouraging more people to take jobs, the IMF said more migration could help boost economies and offset the effects of the ageing population.
It said: “Policies designed to facilitate the flow and integration of migrant workers, alongside measures to boost labour force participation among older workers in advanced economies – through retirement reforms and labour market programmes – could mitigate the increasing demographic pressures on labour supply.”
Diaa Noureldin, an economist at the IMF, said migration would provide a useful boost to growth, as long as they integrated properly. “We want to see them integrating in the societies, getting high-paid jobs, their skills fully recognised, and they can participate fully in the labour market.”
While the US has successfully lifted productivity over time, other countries had struggled to do this and needed new policies to grow more quickly, the IMF said.
Slashing subsidies and cutting red tape could help, while boosting international trade could also force companies to become more competitive, the IMF said.
In a separate report, the institution warned governments against industrial strategies which included expensive, wasteful subsidies or which risked starting trade wars by blocking foreign companies from their markets.
“Industrial policy that steers innovation toward specific sectors such as ‘green’ (lowcarbon) technologies and AI is experiencing a resurgence in many major economies amid concerns about economic and national security, often at a hefty fiscal expense.
“History shows that industrial policy is prone to policy mistakes. Even when projects transform industries, they often entail high fiscal costs and negative cross border spillovers.”
International spats could be particularly costly, the IMF said. “Policies discriminating against foreign firms can prove particularly self-defeating, as a large share of knowledge is imported even in major advanced economies, and such policies can trigger costly retaliation,” the report said.
The EU and US both recently objected to the scale of Chinese subsidies for manufacturers of solar panels and electric cars, which Washington and Brussels say are flooding the world with unfairly cheap goods.
Beijing in turn has hit back against what it claims are discriminatory measures against its companies. – Telegraph Group