Cutting UK taxes now would be a mistake, says IMF (2024)

FAQs

What is the IMF saying about the UK? ›

In its flagship World Economic Outlook (WEO), the Washington-based IMF said it was forecasting modest 0.5% UK growth this year – but only as a result of a rising population. Growth per head – one of the key measures of living standards – is expected to remain flat this year after a 0.3% drop in 2023.

The International Monetary Fund has issued a strong warning to Jeremy Hunt against cutting taxes in his budget in March, stressing the need to boost key areas of public spending instead.

These cuts are possible because the economy is turning a corner, thanks to the government's decisive action to bring inflation down from 11.1% to 3.4% and ensure borrowing costs start to fall. Because of this progress, the government can now cut taxes to reward work and grow the economy.

According to the IMF, inflation in the British economy will remain at about 2.5% for the rest of this year but fall towards the Bank of England's target of 2% next year. When looked at per head - with output split across the UK's population - GDP flatlines, with no growth at all for 2024 and 1.1% in 2025.

Since the collapse of fixed exchange rates in 1973, the fund has taken a more active role, especially in developing countries. Some critics say the conditions the IMF attaches to its loans are too harsh and have harmed developing countries.

The 1976 Debt Crisis

This balance of payment issue coupled with citizens losing confidence in spending, would result in the UK borrowing 3.9 billion from the IMF. This was the largest loan from the IMF at the time, but only half of the loan would be taken out. The UK rebuilt their reserves and repaid the loan by 1979.

The crisis entered public consciousness as marking the low point in Britain's post-war relative economic decline. There were three intertwined strands: a sterling crisis; a sovereign debt crisis; and heavily leaked factional frictions within the governing Labour administration.

Ladies and gentlemen, this is the third lecture in a series on post-War political crises, and this lecture is on the 1976 crisis when Britain was forced to borrow money from the IMF, the International Monetary Fund, and in return, to allow IMF supervision of its economic policies.

It is not always ethical for the IMF to bail out countries that repeatedly make bad economic and fiscal decisions. This is because bailing out such countries may encourage them to continue making bad decisions, as they may expect the IMF to step in again in the future.

For instance, while the UK has a progressive tax system with rates ranging from 20% to 45%, the US federal tax rates vary from 10% to 37%. Additionally, the USA taxes its citizens and residents on their worldwide income, whereas the UK taxes are based on residence and domicile status.

Why were the British taxing everything? ›

Parliament passed the Stamp Act on March 22, 1765, to pay down a national debt approaching £140,000,000 after defeating France in the Seven Years War (1763). A year earlier, Parliament passed the Sugar Act, their first revenue-raising measure. Both taxes promised dire consequences in a post-war economy.

VAT-free shopping in the UK is gone for good, it has been announced. It was scrapped after Brexit at the start of 2021 and then brought back. But the UK's Chancellor has now confirmed it will not return. The perk made shopping in the country 20 per cent cheaper for international visitors.

“UK inflation is stickier than that in the US and this may not be reflected in the market pricing of rate paths,” Greene said in a speech at Fitch Ratings. “Inflation in the UK remains further above target than in the US and the euro-area.

The OECD said Tuesday that year-on-year inflation in the G7 fell to 4.6% in May, down from 5.4% in April, reaching its lowest level since Sept. 2021.

Weak GDP growth

The Bank of England has warned there is a 50-50 chance of a recession, beginning around the time a spring general election could be held, amid the impact from higher borrowing costs. It expects zero growth for 2024 as a whole.

The UK economy has bounced back from recession, with stronger-than-expected growth of 0.6 per cent in the first quarter of 2024 – the strongest of all G7 economies.

People spending less, doctors' strikes and a fall in school attendance dragged the UK into recession at the end of last year, official figures show.

New data reveals that the UK slipped into a technical recession at the end of last year, marked by a modest economic downturn in Q4 2023. Despite challenges, signs of recovery are emerging though, with business investment seeing a modest rise.