IMF warns UK to keep budget in check or risk market revolt
The government needs “to stay the course and deliver the planned deficit reduction over the next five years”
[BRUSSELS] UK Chancellor of the Exchequer Rachel Reeves must stick to her fiscal rules and keep spending under control or risk a market backlash that undermines the government’s economic plans, the International Monetary Fund warned.
In its Article IV annual health check of the economy, the world’s economic supervisor told Reeves that any additional spending, such as proposals to reverse cuts to winter-fuel subsidies for pensioners or ending the two-child benefit limit, will need to be covered by other savings or tax rises.
The government needs “to stay the course and deliver the planned deficit reduction over the next five years to stabilise net debt and reduce vulnerability to gilt market pressures,” the fund said.
Global trade uncertainty and market shocks could yet derail the outlook, it added. “Materialisation of these risks could result in market pressures, put debt on an upward path, and make it harder to meet the fiscal rules, given limited headroom.” The IMF proposed “additional revenue or expenditure measures as needed if shocks arise.”
Its recommendations come ahead of the June 11 Spending Review, when Reeves will set budget limits for government departments for the next three years. She fixed the envelope in March but left just £9.9 billion (S$17.2 billion) of headroom against her main fiscal rule that taxes must cover day-to-day spending by the end of the parliament, one of the smallest margins on record.
Reeves has already experienced the reaction of gilt markets to any hint of fiscal laxity at a time when the national debt is close to 100 per cent of gross domestic product. Her big-borrowing budget in October drove up debt costs, more than wiping out her fiscal buffer as yields on long-end debt soared to a 27-year high. Reeves was forced to slash spending in the March Spring Statement to repair the damage.
Pressure on the public purse has mounted in recent days. The government has promised to unwind the cut to winter fuel payments, which would cost up to £1.8 billion, and is considering raising the two-child cap on benefits, potentially costing another £2.5 billion amid growing calls from within the ruling Labour Party to relax its self-imposed budget limits. Prime Minister Keir Starmer is not ruling out any policy to ease child poverty, his spokesman Dave Pares told reporters on Tuesday, but insisted the government views the fiscal rules as vital and non-negotiable.
“One of the elements why there is intense focus on headroom is because headroom is not very high,” said Luc Eyraud, the IMF’s UK mission chief. “To reduce the reactivity of short-term policy to the concept of headroom, the first solution should be to have higher headroom.” BLOOMBERG
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