Rachel Reeves must be careful not to choke Britain’s growth in the Budget, the International Monetary Fund (IMF) has warned.
The Washington-based forecaster’s chief economist Pierre Olivier-Gourinchas yesterday said the Chancellor must tread a ‘narrow path’ to build fiscal buffers but preserve output.
Ms Reeves is expected to hike taxes and slash spending in a bid to raise £40billion when she unveils her first budget a week tomorrow.
But the French economist said that trying to ‘do too much too quickly’ could have ‘an adverse impact on growth’.
Meanwhile the Chancellor was yesterday handed the biggest growth update in the G7 as the IMF upgraded Britain’s prospects just days before she unveils her spending plans.
Rachel Reeves must be careful not to choke Britain’s growth in the Budget, the International Monetary Fund ( IMF ) has warned
The Washington-based forecaster’s chief economist Pierre Olivier-Gourinchas (above) yesterday said the Chancellor must tread a ‘narrow path’ to build fiscal buffers but preserve output
That was in stark contrast to the Labour Government’s repeated claims of a dismal economic inheritance that Ms Reeves has branded the ‘worst set of circumstances since the Second World War‘.
The latest keynote World Economic Outlook report released on Tuesday lifted the prospects for UK output this year by 0.4 per cent to 1.1 per cent. It forecast that the UK economy will grow by 1.5 per cent in 2025.
These were among the biggest upward revisions for any Western economy. Fund economists said growth in the UK is ‘expected to accelerate.’
‘Growth in the UK is projected to have accelerated to 1.1 per cent in 2024 and is expected to continue doing so to 1.5 per cent in 2025 as falling inflation and interest rates stimulate domestic demand,’ the IMF report said.
But the fund also issued a stark warning to the Chancellor and other finance ministers that moving too quickly to reduce borrowing and debt could prove to be a serious error.
It cautioned that ‘excessively front-loading the adjustments may end up hurting economic activity.’
Meanwhile, in contrast it reported that the German and Italian economies were struggling from a prolonged downturn in manufacturing.
Ahead of Ms Reeves’ first budget there have been endless reports of swingeing tax increases designed to close a black hole of up to £40billion.
That was in stark contrast to the Labour Government’s repeated claims of a dismal economic inheritance that Ms Reeves has branded the ‘worst set of circumstances since the Second World War ‘
Chief Secretary to the Treasury Darren Jones. The Bank of England is now widely forecast to cut bank rate by a quarter of a percentage point next month
Among the most likely revenue raisers is a surcharge on employers’ national insurance contributions which would in effect be a tax on jobs and economic growth.
Other measures such as an increase in capital gains tax, closing loopholes in the inheritance levy and a limit on savings into tax free ISAs would be as direct assault on private sector investment and could see entrepreneurs and City firms flee the UK for more welcoming locations overseas.
‘If you try to do too much too quickly, you might have an adverse impact on growth,’ Gourinchas told reporters in Washington.
‘You have to be careful because most countries have important needs when it comes to spending.’
That means finding ‘the spending which contributes to growth,’ Gourinchas added.
In spite of the global pick-up since the end of pandemic and Russia’s war on Ukraine the IMF expects no improvement in global output this year or next with growth projected at 3.2 per cent.
Britain will be among the better performers among the G7 richest economies lagging only behind the United States and Canada.
The Bank of England is now widely forecast to cut bank rate by a quarter of a percentage point next month to 4.75 per cent with a further reduction in December.
Ms Reeves said: ‘It’s welcome that the IMF have upgraded our growth forecast for this year, but I know there is more work to do.
‘That is why the Budget next week will be about fixing the foundations to deliver change, so we can protect working people, fix the NHS and rebuild Britain.’
Shadow Chancellor Jeremy Hunt said: ‘Today’s data from the IMF confirm the economic inheritance from the last Conservative government was strong – the Chancellor shouldn’t wreck it by trash talking the British economy or killing off investment with tax rises.’
