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The IMF has warned Britain of further tax cuts ahead of the election

The IMF has warned Britain of further tax cuts ahead of the election

The International Monetary Fund warned the British government on Tuesday that it was on track to miss its debt target and should not make tax cuts ahead of this year's election because future tax hikes would be necessary.

The IMF raised its forecast for UK economic growth in 2024 to 0.7% from 0.5% in April. The increase reflects strong growth data in early 2024 and will be welcomed by Prime Minister Rishi Sunak as he battles to win back voter support.

However, the annual report on the British economy has criticized Sunak's government's policies, particularly recent tax cuts in the form of lower social security contributions.

Although inflation is not expected to return permanently to the BoE's target until early 2025, the IMF said the Bank of England should cut interest rates by a quarter of a point two or three times this year.

The UK faces a “soft landing” after a short, shallow recession in the second half of 2023, the fund said.

Finance Secretary Jeremy Hunt focused on improving the immediate economic outlook, saying the IMF agreed with its latest comments that the UK economy had turned a corner.

“It is time to shake off some unwarranted pessimism about our prospects,” he said in a statement.

However, the fund said growth would slow and debt levels would continue to rise. Without the BoE's bond-buying programme, he predicted public sector net debt would reach 97% of GDP in the 2028/29 financial year.

In March, Britain's budget authority – the Office for Budget Responsibility – said the government was on track to meet its target of reducing debt to GDP in the final year of its five-year forecast horizon.

The fund said it was forecasting higher spending than the United Kingdom had forecast, and that Britain would need to tighten its belt by tax increases or spending cuts — an average of 1 percentage point of GDP, or about 30 billion pounds ($38 billion). ) one year, the loan must be confirmed by the end of the decade.

He would have advised against the social security rates already introduced by the government as they would have cost 0.5% of GDP more.

Taxes should increase

In addition, the UK should consider new revenue-raising measures such as higher taxes on carbon and road use, widening the base of VAT and inheritance tax, and reforming capital gains and wealth taxation.

The state pension would have to be linked to inflation – factoring in wage growth, rather than a “triple lock” system – and government technology investments could lead to higher payments for public services.

The IMF said weak investment in the past was now weighing on the growth rate of the UK economy and the government's efforts to curb immigration were a further headwind to growth.

“Given these challenges, IMF staff generally advise against additional tax cuts that are credibly growth-enhancing and are not adequately offset by high-quality deficit reduction measures,” the IMF said.

Sunak and Hunt are expected to offer more sweeteners to voters after the summer, which polls show will be won by the opposition Labor Party ahead of the election.

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