UK: IMF warns Tories against further UK tax cuts

Amid a higher debt burden, U.K. should not be considering pre-election tax cuts, forecaster says.

The International Monetary Fund advised Chancellor Jeremy Hunt against additional tax cuts in its annual “health check” of the U.K. economy.

The forecaster said that further tax cuts should only be considered if they are “credibly growth-enhancing and appropriately offset by high-quality deficit-reducing measures.”

Hunt has already announced two successive 2p cuts to National Insurance. He has hinted at yet another cut in a potential pre-election budget, and has repeatedly suggested the Conservative Party would get rid of employee National Insurance entirely.

But amid a higher debt burden, the U.K. should not be considering further cuts, the IMF said: “Against the backdrop of these challenges, as a general principle, staff would advise against additional tax cuts.”

The government should instead prioritize stabilizing debt in the long term, the IMF’s report said. To ease the debt burden, it said the Exchequer’s primary balance — the difference between revenue and spending — needs to be around 1 percentage point of GDP higher compared to next year’s baseline. 

To do so, the IMF suggested boosting government revenue by hiking carbon and road-usage taxation, broadening VAT and inheritance tax bases, and reforming capital gains and property taxation. These are all measures the forecaster recommended in its 2023 annual report.

In more positive news, the IMF noted the U.K.’s “stronger than expected” exit from its technical recession in the second half of 2023, with real GDP growth now forecast at 0.7 percent in 2024 before rising to 1.5 percent in 2025.

However, it said longer-term growth prospects for the U.K. “remain subdued” due to weak labor productivity and higher-than-expected inactivity levels due to long term illness.

Hunt said the report shows the “U.K. economy has turned a corner and is on course for a soft landing … so it is time to shake off some of the unjustified pessimism about our prospects.”