The International Monetary Fund (IMF) has said Jeremy Hunt should not be planning to cut taxes any time soon.
In what will be seen as a bombshell intervention ahead of this year’s election, the Fund, widely regarded as the world’s most authoritative economic body, said its analysts had advised the UK Treasury not to cut taxes.
And, in a further blow to the chancellor, it expressed scepticism about his spending plans for the coming years, raising questions about his ability to meet his own fiscal rules.
The comments, issued alongside the Fund’s latest update to its economic forecasts, comes after the chancellor signalled that he plans to cut taxes in March’s spring Budget.
An IMF spokesman said: “As noted in the 2023 Article IV consultation, preserving high-quality public services, and undertaking critical public investments to boost growth and achieve the net zero targets, will imply higher spending needs over the medium term than are currently reflected in the government’s budget plans.
“Accommodating these needs… will already require generating additional high-quality fiscal savings, including on the tax side.
“The IMF has recommended strengthening carbon and property taxation, eliminating loopholes in wealth and income taxation, and reforming the pensions triple lock.
“It is in this context that staff advises against further tax cuts.”
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The comments came as the Fund cut its forecast for UK growth next year, from 2% to 1.6%.
However, the UK is no longer forecast to be the slowest growing economy among the Group of Seven industrialised nations, after the Fund cut its outlook for Germany this year to 0.5% – below Britain’s (unchanged) 0.6% forecast.
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Chancellor aims to cut taxes
However, it is the IMF’s comments on taxation which will most upset the Treasury.
Mr Hunt has said repeatedly that he plans to cut taxes in future fiscal events.
Many inside the Conservative Party believe tax cuts are their strongest hope of improving their polling ahead of the general election.
That those tax cuts are seen by the world’s leading economic authority as an imprudent move will undermine the chancellor’s case.
Mr Hunt said: “The IMF expect growth to strengthen over the next few years, supported by our introduction of the biggest capital investment tax reliefs anywhere in the world, alongside National Insurance cuts to improve work incentives. It is too early to know whether further reductions in tax will be affordable in the Budget, but we continue to believe that smart tax reductions can make a big difference in boosting growth.”
The former IMF deputy director, the economist Mohamed A. El-Erian, told Sky News that he supported the fund’s “unusual” intervention, saying that it effectively called on Mr Hunt to invest in the future and not his party’s political prospects.
“They’re basically saying you need to promote higher growth and higher productivity.
“We have got fiscal constraints. We have absorbed major shocks in the last few years that have resulted in higher deficits, of course the pandemic, the energy crisis. All that has contributed to higher deficits so there is a limit to how much room we have on the fiscal side,” he said.
