The International Monetary Fund has hit out at Liz Truss and Kwasi Kwarteng’s tax cuts for the rich, warning that “large and untargeted fiscal packages” would probably deepen inequality in Britain.
In a rare intervention, the IMF took aim at the British government after the UK chancellor’s mini-Budget on Friday caused sterling and bonds to plummet and gilt yields to soar, reflecting the cost of borrowing.
The market turmoil started after investors were spooked by Mr Kwarteng’s plan to offer tax cuts to the richest while increasing state expenditure dramatically.
“We are closely monitoring recent economic developments in the UK and are engaged with the authorities,” an IMF spokesperson said.
“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,” they added.
The global lender predicted that the UK’s new measures would “likely increase inequality” rather than achieving the government’s aim of creating a prosperous Britain.
It urged the British chancellor to change tack when he gives a statement on 23 November, a promise he made earlier this week in a bid to calm the markets.
“The 23 November budget will present an early opportunity for the UK government to consider ways to provide support that is more targeted and reevaluate the tax measures, especially those that benefit high-income earners,” the IMF said.
Commentators noted that the IMF’s wording closely resembled warnings it typically gives to emerging economies in the throes of a current account crisis. It comes after Larry Summers, a former US treasury secretary, accused Britain of “behaving a bit like an emerging market turning itself into a submerging market”.
Labour said the IMF’s statement showed the dangers of Ms Truss’s and Mr Kwarteng’s economic policies.
Shadow chancellor Rachel Reeves said: “This statement from the IMF shows the seriousness of the situation.
“Families will be concerned about what market movements in recent days mean for them.
“The government must urgently lay out how it will fix the problems it created through its reckless decisions to waste money in an untargeted cut in the top rate of tax.
“Waiting until November is not an option. The government must urgently review the plans made in their fiscal statement last week.
“First the Bank of England had to step in to reassure markets. Now, this statement from the IMF should set alarm bells ringing in government and make it clear that they need to act now.”
In response to the IMF’s rebuke, a UK Treasury spokesperson said: “We have acted at speed to protect households and businesses through this winter and the next, following the unprecedented energy price rise caused by [Vladimir] Putin’s illegal actions in Ukraine.”
They insisted ministers were “focused on growing the economy to raise living standards for everyone”, and promised that the chancellor would set out measures in November to ensure that debt falls as a share of GPD “in the medium term”.
Mr Kwarteng continues to deny that he has committed “economic vandalism” as his opponents have alleged. Instead, he told investors on Tuesday that he would boost growth through deregulation.
“We are confident in our long-term strategy to drive economic growth through tax cuts and supply-side reform,” he said.
It is not just opposition parties that have condemned the new government’s actions. Many backbench Tory MPs are said to be deeply concerned about the sliding of the pound, which has brought Labour its biggest lead over the Conservatives for two decades.
Mel Stride, a Sunak ally who chairs the Commons Treasury Committee, said his party’s strategy put it “in jeopardy”.
Meanwhile, Sir Charlie Bean, a former deputy governor of the Bank of England, told Sky News that the Bank should hike interest rates immediately to reassure the markets.
“The thing about credulity is when you lose it, it can be quite difficult to get it back,” he said. “It takes time.”
