Kwarteng has every right to state his case after IMF joins the Truss-bashing

The Chancellor will draw special attention next month in Washington following budget warning

When the International Monetary Fund holds its first in-person annual meeting since before the pandemic next month in Washington DC, one guest among the world’s economic power brokers will draw special attention. Kwasi Kwarteng will arrive having been accused by his hosts of threatening financial stability in only his third week as Chancellor.

“We do not recommend large and untargeted fiscal packages at this juncture, as it is important fiscal policy does not work at cross purposes to monetary policy,” the IMF warned in a highly unusual criticism of a G7 government on Tuesday that urged Mr Kwarteng to reverse his tax cuts.

It was not the reaction Mr Kwarteng and the Prime Minister, were hoping for days after a major announcement mere weeks into their time in charge.

The Conservatives have long played it by the book when it comes to fiscal policy. In the party’s 12 years in Government until now, it has broadly tried to bring down the budget deficit, aside from emergencies in which it has borrowed heavily.

This used to be very much in line with the global consensus, including the IMF. International economists loosened up a little, after tight policy following the financial crisis may have actually slowed the recovery. The Conservatives, broadly, thought they were doing the same.

But the scale of borrowing, alongside the energy crisis, seems to have spooked markets, and the IMF has joined in the Liz Truss-bashing with a degree of enthusiasm.

This was not a scheduled statement. It came in response to media questions on the UK’S borrowing plans and the market reaction.

Observers were shocked by the IMF’S tone. Adam Posen, a former Bank of England policymaker now at the Peterson Institute for International Economics, tweeted “it is bizarre the IMF and [US Treasury] have so publicly … called out a G20 nation’s domestic policy” when he can see no “urgent risk” to the wider world.

Lord Frost, the former Brexit minister, said the IMF is “still in the intellectual world of Gordon Brown,” arguing that following the organisation’s “highly conventional economic policies” has “produced years of slow growth and weak productivity”.

The IMF has been in the bad books of many Brexit-backing Conservatives ever since the referendum in 2016.

Tuesday’s warning is not the first from the IMF to have triggered accusations of political meddling.

Christine Lagarde, the former head of the fund and now president of the European Central Bank, offered a grovelling apology in 2014 after her economists warned former chancellor George Osborne his austerity policies were “playing with fire”. The IMF had downgraded the UK’S growth forecast to 0.7 per cent in 2013 – but in the event the economy actually grew by 1.7 per cent. Then, two years later, Ms Lagarde enraged Brexiteers by warning the economic consequences of leaving the EU would be “pretty bad, to very, very bad”.

Brexit-backing Tories suspect the watchdog has been unreasonably downbeat in its assessments of the British economy ever since then. In the latest update in July, the IMF predicted Britain would grow more slowly than any other G7 economy next year, predicting growth of 0.5 per cent.

Its update will be watched closely – other international groups believe Britain is far from the most vulnerable to the economic havoc unleashed by Russia’s invasion of Ukraine. The Paris-based OECD thinks Britain will stagnate next year but that Germany will plunge into outright recession.

Kristalina Georgieva, who took over from Ms Lagarde in 2019 after a stint as chief executive of the World Bank, has not been without controversies either.

The Bulgarian, who served as a vice-president in Jean Claude-juncker’s EU Commission, was forced to defend her reputation when it was alleged that in her previous job, she had pressured World Bank staff to flatter China’s economic numbers.

The IMF’S directors said there was no conclusive evidence of wrongdoing and kept her in post, and Georgieva insisted there was “no doubt in the credibility” of the fund itself.

So how seriously should Ms Truss take the dressing down? The IMF has long been the champion of financial orthodoxy. Established, funded and run by the governments from across the world, it exists to step in when something goes wrong.

When a government runs out of money, the institution sends in its experts with policy advice and tax-and-spend recommendations, and only dishes out the rescue funds if its orders are followed. That generally means immediate austerity.

The fate of Greece may be the most famous instance of recent years. IMF help when Athens ran out of money after years of living beyond its means, meant slashing government spending and ramping up taxes.

Britain had its own bailout in 1976, when James Callaghan’s Labour government faced rampant inflation in the wake of an energy crisis, the biggest budget deficit since the Second World War and pressure on the pound. As in Greece, IMF help came with strict conditions.

This time, however, the IMF has no leverage over the Government – their warning is one of opinion, rather than one with immediate consequences.

The UK is a member state of the IMF like any other, albeit one which has a little more clout thanks to its status as a founder of the organisation that stumps up more than 4 per cent of its funds. That pays for bailouts, funds the advice which the IMF is dishing out right now – and means the Chancellor has every right to state his case at next month’s awkward meeting.

The scale of borrowing alongside energy crisis has spooked markets and IMF has joined in Truss-bashing

Brexit-backing Tories suspect the watchdog is unreasonably downbeat in assessment of UK economy