IMF criticizes huge UK tax cuts and urges a rethink

CNN Business

One of the world’s leading multilateral financial institutions has joined a chorus of criticism of huge tax cuts announced by the UK government last week that sent the pound plunging to a record low.

In a rare and stinging rebuke for such a large developed economy, the International Monetary Fund warned that the tax cuts — the biggest in Britain since the early 1970s — would likely increase inflation and inequality.

“Given elevated inflation pressures in many countries, including the UK, we do not recommend large and untargeted fiscal packages at this juncture, as it is important that fiscal policy does not work at cross purposes to monetary policy,” an IMF spokesperson told Reuters.

The collapse in the pound since Friday has been accompanied by an eye-watering surge in UK borrowing costs, with yield on 5-year government bonds now topping those of much more heavily-indebted European economies such as Italy and Greece.

Financial markets are now expecting the Bank of England to have to raise rates to near 6% by next spring, from 2.25% at present, to shore up the currency and contain the inflationary pressures unleashed by the huge fiscal giveaway. The central bank’s chief economist on Tuesday promised “significant” rate action at its next meeting in November.

The government of Liz Truss, who succeeded Boris Johnson as prime minister only three weeks ago, said Friday that it would cut taxes by £45 billion ($48 billion) in a bid to get the UK economy moving again. The package includes scrapping the highest rate of income tax for top earners and a big increase in government borrowing to slash energy prices for millions of households and businesses this winter.

But many leading economists have described the unorthodox measures as a reckless gamble, and have warned that they will force the Bank of England to slam on the brakes even harder as it tries to tame inflation that is already running near 40-year highs at almost 10%.

UK finance minister Kwasi Kwarteng has shown no signs of backing down, despite the market crash.

The UK Treasury has tried to calm market nerves by saying it will provide more details of its plans on November 23 and is committed to ensuring that debt falls as a share of UK GDP in the medium term.

The IMF called on the UK government to use the statement in November as an opportunity “to consider ways to provide support that is more targeted and reevaluate the tax measures, especially those that benefit high-income earners.”

But that may come too late for businesses, which are already facing a sharp rise in borrowing costs, and hundreds of thousands of mortgage holders who will need to refinance their loans in the last quarter of this year. Hundreds of mortgage products have already been pulled from the market as banks struggle to keep pace with bond market volatility.

— Julia Horowitz and Anna Cooban contributed to this article.

Source link

Leave a Comment