IMF urges UK to curb rising debt

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Rishi Sunak has been warned by the IMF to take much tougher action to rein in the UK’s public debt, putting a question mark over the prime minister’s cuts to national insurance.

The IMF on Wednesday listed the UK in its Fiscal Monitor publication as one of four large economies that “critically need to take policy action to address fundamental imbalances between spending and revenues”.

The fund predicted further increases in the UK’s ratio of net debt to gross domestic product, from 92 per cent today to 98 per cent by the end of the decade. It also urged the US, China and Italy to take action on debt.

The IMF warned of the risk of “fiscal slippage” around the world given this year’s large number of elections, which are often associated with looser budgetary policy ahead of polling day.

Chancellor Jeremy Hunt told the Financial Times on Tuesday the government would like to cut taxes in an autumn fiscal event “if we can”. He has vowed to go further if the Tories win the general election expected this year by eventually scrapping national insurance contributions.

Speaking to reporters in Washington on Wednesday, Hunt insisted the IMF had “given credit” to the UK government for the “difficult decisions we’ve taken to get our public finances in order”.

He struck an upbeat tone about the UK economy, saying it appeared that “we’ve achieved a soft landing” without a significant rise in unemployment and that living standards had risen under the prime minister.

Labour leader Sir Keir Starmer said the plan to abolish national insurance would cost £46bn a year and was completely unfunded, drawing parallels to former premier Liz Truss’s disastrous “mini” Budget, which included £45bn of unfunded tax cuts.

Starmer claimed Sunak would be forced to cut spending on state pensions or the NHS, or put up income tax to fund the policy. “Which is it?” he said at prime minister’s questions time in the House of Commons on Wednesday.

Sunak insisted the policy would only be delivered when it was affordable. Downing Street added the plan was “a long-term ambition” to eliminate national insurance contributions by workers, which have been cut from 12 per cent to 8 per cent by Hunt.

Tory officials said they hoped to make “significant progress” in the next parliament with the reform, but insisted any reductions in national insurance would be fully costed and funded.

Sunak also launched a stinging attack against Truss, signalling how he will seek to distance his government from her damaging economic legacy in the general election campaign.

He criticised Truss’s economic prospectus twice during heated exchanges in the Commons and said he warned against her proposals when he unsuccessfully challenged her for the Conservative leadership in 2022.

“I did have the stomach to argue out loud about her economic policies, have the conviction to say they were wrong,” Sunak told MPs, after Starmer said Truss had crashed the UK economy.

The IMF previously warned Hunt in January against cutting taxes in his March Budget because of the need to curb borrowing and prioritise spending in areas such as health and education.

The IMF on Wednesday questioned Hunt’s latest cut to national insurance in the March Budget, saying that even while it had been “part-funded by well-conceived revenue raising measures”, the action could worsen the public debt trajectory in the medium term.

“Population ageing and labour market mismatches are further expected to exert pressure on fiscal positions,” the fund said.

Though its projection for UK debt to hit 98 per cent of GDP by the end of the decade would still leave the country below the US, Italy and France, the IMF was concerned about the direction of Britain’s borrowing position.

The Conservatives, trailing Labour by 20 percentage points in the polls, have touted the outright abolition of national insurance as a massive tax simplification that would help make work pay.

The Tories’ existing plans include a pledge to increase day-to-day Whitehall departmental spending by 1 per cent a year overall in real terms after the election.

The plans could mean harsh cuts in some departments given promises of bigger increases in areas including healthcare.

The IMF said global momentum to bring fiscal balances back to pre-pandemic levels has “faltered”.

“Decisive fiscal consolidation efforts are needed to safeguard sustainable public finances and rebuild fiscal buffers in a context of elevated public debt, slowing medium-term growth prospects, and still high interest rates,” it added.

The IMF said delaying efforts to strengthen public finances “could increase vulnerabilities and limit fiscal space to deal with future crises, potentially leading to a more painful fiscal adjustment and adverse financial consequences”.

The Treasury said: “The chancellor has been clear that growing the economy and improving productivity is vital to improving public services, and that any further tax cuts will be delivered in a fiscally responsible way.”