Economy to shrink after tax raid, says IMF
UK predicted to be only G7 nation that will not grow this year owing to ‘tighter’ policies
THE UK is on course to be the only major economy to shrink this year because of Jeremy Hunt’s tax raid and higher borrowing costs, according to the International Monetary Fund.
The IMF downgraded its 2023 UK growth forecast by more than any other G7 nation, blaming the prospect of a deeper recession on “tighter fiscal and monetary policies”. It leaves the economy languishing behind Germany and even Russia, with both countries expected to eke out growth this year.
It comes as Rishi Sunak is under pressure from Tory MPS to deliver a plan for growth, and follows criticism from business leaders including Archie Norman, the Marks & Spencer chairman, and Sir James Dyson, of the government’s economic approach.
The Prime Minister and the Chancellor are, however, resisting calls to cut taxes in the forthcoming budget, with Mr Hunt insisting on Friday that inflation needed to come down first.
Tomorrow Britain faces the biggest day of industrial action in more than a decade with strikes by an estimated 500,000 workers across seven unions set to bring the economy to a halt.
Schools will close as teachers walk out, and the railways, Civil Service and universities will also be affected.
The IMF singled out the UK as the only big economy in the advanced or developing world set to suffer a contraction, with a predicted decline of 0.6 per cent in 2023.
This is down from its previous projection of 0.3 per cent growth three months ago and means the UK will go from being the fastest-growing G7 economy in 2022 to the only economy expected to shrink this year.
The IMF said that the downgrade reflected higher taxes and interest rates, a government spending squeeze and “financial conditions and still-high energy retail prices” that will “weigh on household budgets”.
“Consumer confidence and business sentiment have worsened,” the IMF said in an update of its World Economic Outlook. “With inflation at about 10 per cent or above in several euro-area countries and the United Kingdom, household budgets remain stretched. The accelerated pace of rate increases by the Bank of England and the European Central Bank is tightening financial conditions and cooling demand in the housing sector and beyond.”
Britain’s weak economic performance is expected to continue into 2024, the IMF said, with the economy expected to grow by 0.9 per cent as nervous households keep adding to their savings rather than spending money built up during the pandemic.
Annual growth of 0.9 per cent in 2024 would also represent the joint lowest growth in the G7 club of economies, alongside Italy and Japan, which have suffered decades of stagnation.
Business leaders have sharpened their attacks on the Government’s lack of a credible growth plan in recent weeks, with the Institute of Directors calling Mr Hunt’s strategy “empty”, and constant policy changes described as a “recipe for disaster” by the British Chambers of Commerce.
Sir James, the founder of Dyson, accused the Government of a “stupid” economic approach, while Mr Norman said that plans to ease post-brexit trade were “baffling” and “overbearing”.
Some of the world’s biggest energy firms have warned that a windfall tax on profits introduced by Mr Sunak when chancellor and increased by Mr Hunt will lead to less investment in the UK.
Mr Hunt has privately admitted that he believes an assumption by the Office for Budget Responsibility (OBR) that households will drive down their savings in order to fund their spending habits is too optimistic.
A leaked OBR memo suggests Britain’s shrinking workforce will leave the economy with less room to grow before inflationary pressures start to build, leaving the economy and public finances in a worse position ahead of the Spring Budget. Last week, Mr Hunt said any “significant” tax cuts were “unlikely” in his March 15 statement.
“Short-term challenges should not obscure our long-term prospects year,” he said in response to the IMF’S outlook.