The IMF has warned Rishi Sunak to take more aggressive action to reduce the UK public debt. This puts into question the prime minister’s plans to cut national insurance.
The IMF published its Fiscal Monitor on Wednesday, and listed the UK as one of four major economies that “critically needs to take policy actions to address fundamental imbalances in expenditure and revenue”.
The fund forecast that the UK’s net debt ratio would increase from 92 percent today to 98 percent by the end decade. The fund also called on the US, China and Italy take action to reduce debt.
IMF has warned that there is a risk of “fiscal slippingpage” in the wake of this year’s many elections. These are usually associated with a looser budget policy before polling day.
Chancellor Jeremy Hunt said on Tuesday that the government would be happy to reduce taxes during an autumn fiscal event, “if we could”. He has promised to go even further if he wins the expected general election this year.
Hunt told reporters in Washington that the IMF had “given the UK government credit” for “the difficult decisions we have taken to get our finances in order.”
He was upbeat about the UK’s economy. It appeared “we have achieved a soft land” without an increase in unemployment. And that the living standards under Prime Minister Cameron had increased.
Labour leader Sir Keir starmer said that the plan to eliminate national insurance would cost £46bn per year and is completely unfunded. He drew parallels with former premier Liz Truss’s disastrous “mini” Budget, which included £45bn in unfunded tax reductions.
Starmer said Sunak would have to reduce expenditure on state pensions and the NHS or raise income tax in order to fund this policy. He asked, “Which one is it?” during prime minister’s question time on Wednesday in the House of Commons.
Sunak said that the policy will only be implemented when it is affordable. Downing Street said the plan is “a long-term goal” to eliminate workers’ national insurance contributions, which Hunt had reduced from 12 to 8 percent.
Officials from the Tory Party said that they hoped for “significant progress” with the reform in the next Parliament, but insisted on the full costing and funding of any reductions to the national insurance.
Sunak launched an incisive attack on Truss as a way to signal his intention to distance himself from Truss’s damaging economic legacy during the general election campaign.
He criticised Truss’s economic prospects twice in heated exchanges at the Commons, and warned against her plans when he unsuccessfully ran for the Conservative Leadership in 2022.
Sunak said to MPs that she had the guts to debate her economic policies and the conviction to declare them wrong, after Starmer claimed Truss crashed the UK’s economy.
Hunt was warned by the IMF in January not to cut taxes in his budget for March due to the need to curb borrowing , and prioritize spending on areas like health and education.
IMF questioned Hunt on Wednesday’s latest reduction to national insurance, which was included in the Budget for March. The IMF said that while the cut had been “partly funded by well-conceived measures of revenue raising”, it could have worsened the trajectory of public debt in the medium-term.
The fund stated that “population ageing and mismatches in the labour market are expected to further exert pressure on fiscal position.”
The IMF is concerned with the current direction of Britain’s debt. Even though its projection of UK debt reaching 98 percent of GDP in a decade will still place the country behind the US, Italy, and France, it was worried about the future of Britain’s borrowing.
The Conservatives are 20 points behind Labour in the polls and have argued that the abolition outright of national insurance would be a tax simplification which would make work more rewarding.
Tories have pledged to increase spending on day-today Whitehall departments by 1% a year in real terms.
Plans could lead to harsh cuts in certain departments, given the promises of larger increases in other areas such as healthcare.
The IMF stated that the global momentum for bringing fiscal balances to levels prior to pandemic has “faltered”.
It added that “decisive fiscal consolidation is needed to safeguard sustainable finances for the public and to rebuild fiscal buffers, in an environment of high public debt, a slowing growth outlook on medium term, and high interest rates.”
IMF stated that delaying efforts to improve public finances could “increase vulnerabilities and limit fiscal room to deal with future crisis, potentially leading to more painful fiscal adjustments and adverse financial implications”.
Treasury: “The chancellor made it clear that improving public services requires a growing economy and improved productivity. Any further tax reductions will be implemented in a fiscally-responsible manner.”