The debt-laden UK economy needs to stay the course on deficit reduction and use cost-of-living relief sparingly or risk reigniting inflation, the International Monetary Fund warned on Tuesday.
The warning comes just over two weeks before UK Chancellor of the Exchequer, John Healey, presents his first annual budget.
It is important there is no slippage in the face of higher debt interest costs and pressure to spend more on defence and energy subsidies, said the new IMF chief economist Silvana Tenreyro, who served as a Bank of England policymaker from 2017 to 2023.
“The UK has already started the [fiscal] consolidation path … It is on that trajectory, and the message for the UK is simply stay the course and continue on that trajectory,” Ms Tenreyro said at press conference in Bangkok, Reuters reported.
Mr Healey is preparing to announce a series of time-limited giveaways to help voters with the cost of living in the budget on October 28, Bloomberg reported.
The Institute for Fiscal Studies on Monday also urged the Chancellor to address a £35 billion ($46 billion) hole in the spending plans or risk delivering a “work of fiction”, the Financial Times reported.
The UK government ran a budget deficit of 4.4 per cent of gross domestic product last year and aims to balance day-to-day spending with tax revenue by the 2029-30 fiscal year. Previous governments have failed to achieve the same goal.
Energy crisis
Britain is facing a prolonged energy squeeze after the price of European gas surged more than 150 per cent this year. Dwindling gas reserves threaten to keep British consumers' costs high through winter.
The price increase brings the prospect of higher household bills, renewed inflation and further pressure on the UK's fragile economy.
Underground gas storage in Britain was just 48 per cent full at the start of October, compared with 94 per cent in Portugal and 99 per cent in Poland, according to figures reported alongside the latest winter outlook from the European Network of Transmission System Operators for Gas.
Britain has historically relied on imported gas rather than extensive domestic storage, which leave it vulnerable supply disruptions and global market price volatility.
Inflation impact
In its latest World Economic Outlook published on Tuesday, the Washington-based IMF said debt-burdened economies such as the UK should restrict any public relief to “targeted and temporary” measures so they can still be able to pull inflation back.
The multilateral lender expects UK inflation to climb to 3.3 per cent this year and ease to 2.8 per cent next year. The UK aims to bring inflation back to its 2 per cent target and the market expects the Bank of England to start raising rates from next month.
Rebuilding the fiscal space is “urgent”, given elevated debt as well as higher borrowing costs and increasing demands on public budgets, against an ever-worsening global geopolitical backdrop, the latest IMF report warned.
“Support measures should be used sparingly, designed in a way not to complicate the task of monetary policy, and unwound rapidly as the shock dissipates,” the report advised economies supporting elevated debt levels.
The fund expects the UK economy to grow 1.3 per cent this year, an upward revision of 0.5 percentage points from the fund’s projections in April. Growth, however, is estimated to edge lower to 1.2 per cent next year as “higher energy prices and long-term interest rates weigh on consumption and investment”, the IMF added.
“The IMF projections draw attention to both the resilience and the fragility of Britain’s economic prospects,” said Valentin Boboc, chief economist at Institute of Economic Affairs.
“Despite stronger-than-expected growth this year, the longer-term outlook remains disappointing due to high taxes, expensive energy and other impediments to investment.”
Before the budget, the Chancellor needs to focus on “removing obstacles to growth” and should restrain spending, Mr Boboc said.
The country must restore business confidence and “recognise that Britain cannot tax its way to prosperity”, he added.