The IMF warns Hunt against UK tax cuts as the country signals a £30 billion funding gap

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The UK government has no room for new tax cuts and will struggle to rein in spending growth, the IMF said, warning of a hole in public finances of almost £30 billion.

In its annual health check of the British economy, the fund predicted that Britain will smash its budget targets by the end of this decade due to more spending on health and public investment.

The IMF said the government should try to raise revenues through measures such as reforms to VAT, capital gains and inheritance taxes, and by charging for a wider range of public services.

“The government is facing urgent service and investment needs [IMF] will, according to staff, be difficult to achieve within official medium-term spending plans,” the fund said in its annual Article IV report on Britain.

“In the absence of a major boost to potential growth, stabilizing debt levels is likely to involve some difficult choices over the medium term,” it added.

The findings come at a sensitive time, as Chancellor Jeremy Hunt tries to find room for further tax cuts before the next general election.

The Washington-based IMF warned in January of new tax cuts due to Britain’s tight budget conditions, but Hunt went ahead anyway, cutting another 2 cents from national insurance in March.

In Tuesday’s report, the fund said these national insurance cuts could help boost labor supply and would be partially offset by other measures, such as ending non-domiciled tax status.

But it said the chancellor should not have cut national insurance “in light of the medium-term budget challenge” facing Britain.

“Against these challenges, as a general principle, staff would recommend against additional tax cuts unless they credibly promote growth and are appropriately offset by high-quality deficit reduction measures,” the report said.

The bleak outlook will make for sobering readings from the Labor Party, which has refused to reverse national insurance cuts and plans to adopt tight departmental spending plans that have been called a “fiscal fiction” by the Resolution Foundation think tank .

The IMF report casts doubt on official British forecasts that daily department spending will rise by 1 percent per year in real terms over the next few years. It said they were unrealistic due to demands on public services and “critical growth-enhancing investment needs [including for the green transition]”.

The fund said real growth in departmental spending of 2 percent per year would be more realistic. But such a level of spending would help push the public debt-to-GDP ratio to 97 percent in 2028-29, well above the Office for Budget Responsibility’s 93 percent projection.

The report says the government will need to improve the primary budget balance, excluding interest payments, by an average of 1 percentage point of GDP between 2025 and 2026 – the equivalent of just under £30 billion that year.

Despite the dire budget outlook, the fund found that Britain is now approaching an economic “soft landing” after the mild technical recession in 2023, while modestly increasing its forecast for GDP growth in 2024 from 0.5 percent to 0.7 per cent.

Hunt said the report confirmed that the UK economy had reached a tipping point.

“The IMF has upgraded our growth for this year and forecast that we will grow faster than any other major European country over the next six years – so it is time to shake off some of the unwarranted pessimism about our prospects” , he said.

Inflation is expected to return “sustainably” to the Bank of England’s 2 percent target by early 2025. This should pave the way for rate cuts this year, the fund said, as it forecast rate cuts of 0.5 to 0.75 percent for 2024. and a percentage point reduction in 2025.

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