IMF urges UK to control spending as debt spirals beyond other developed economies

Throughout 2024, the IMF has repeatedly highlighted the need for action in the UK, as ITV News Business and Economics Editor Joel Hills reports from Washington

The International Monetary Fund (IMF) has repeated its warning that the finances of the UK government cannot be sustained without either cuts to the scope of the welfare state or increases in taxes.

“The global battle against inflation has largely been won,” Pierre-Olivier Gourinchas, the IMF’s Economic Controller in World Economic Outlook, said.

Prices are stabilising and the IMF wants central banks and governments to respond accordingly. The former is by cutting interest rates. The latter, by “urgently” sorting out their balance sheets.

“In many countries, primary balances, the difference between fiscal revenues and pubic expenditure net of debt service, needs to improve,” Gourinchas said.

The IMF names the UK, US, France, Italy, South Africa and Brazil as countries that need to take immediate steps to prevent national debt from increasing further.

These nations borrowed heavily in order to support businesses and households during the pandemic and the energy shock - they now find themselves in a precarious position.

Gaurinchas said a lack of political will, in parts of the world, to face this challenge head-on, but insists failure to act runs the risk of “disorderly market imposed adjustments,” similar to the sort Liz Truss triggered.

“Success,” Gourinchas added, requires “implementing gradual and credible multiyear adjustments without delay” while adding that aggressive tax rises or spending cuts would be “self-defeating”.

The IMF’s figures show that the ratio between government debt and gross domestic product (GDP) - an important indicator of a country’s economic health - has risen by 57 percentage points in the UK in the last 20 years.

That’s a bigger increase than in the United States (49), Greece and Spain (both 56), plus Portugal (37) - countries we perhaps like to think of as being in a worse economic shape than the UK.

Of the advanced economies, only Japan’s debt-to-GDP ratio has risen by more (63) than the UK’s.

Has the UK government taken heed of the IMF's warnings?

Chancellor Rachel Reeves will travel to Washington later this week ahead of her Budget on October 30.

Reeves is a recent convert to the IMF’s view of the UK’s public finances.

She spent the election campaign in June insisting the only taxes that would rise under a Labour government were those set out in the party’s manifesto.

After becoming Chancellor, she announced that she had discovered things were in a much worse state than she had previously thought, and that additional tax rises and spending cuts would be necessary.

What is interesting is that throughout 2024, the IMF has repeatedly highlighted the need for action in the UK.

In January, it explicitly called on then-chancellor Jeremy Hunt not to cut taxes further in his March budget. He ignored the advice.

Subscribe free to our weekly newsletter for exclusive and original coverage from ITV News. Direct to your inbox every Friday morning.

In April, the IMF named the UK as one of four countries which urgently needed to take steps “to address fundamental imbalances between spending and revenues”.

The following month, on a visit to the UK, the IMF said the government’s spending plans beyond April 2025 are unrealistically low and that whoever won the election would need to either raise taxes by between £22 billion and £39 billion a year or find equivalent savings to get debt under control.

Adding that whoever won the election would probably need either to raise £30 billion a year more by raising taxes or spending would need to be reduced by a similar amount.

The IMF even recommended ways in which the hole could be filled, including scrapping the triple-Lock on pensions, broadening the bases for VAT and inheritance tax, also reforming capital gains and property taxation.

In the end, the IMF’s call for fiscal consolidation (of around 1% of GDP) and its advice on how best to deliver it was ignored by Labour and every other political party.

IMF's latest projections for economic growth

The IMF’s latest assessment of the prospects for the world economy is largely unchanged from the last update in April.

The forecast for economic growth in the US next year is a little stronger. The forecast for the French and German economies is a little weaker.

The forecast for growth in the UK in 2025 is unchanged, although growth this year is upgraded to 1.1% on account of a stronger-than-expected private investment and public spending in the first half of the year.

So, what could go wrong? As ever, quite a lot.

Central banks could keep interest rates too high for too long; the conflict in the Middle East could spike the price of oil; China’s economy could have a seizure; and trade disputes could escalate.

Low rates of economic growth and high levels of national debt are an unforgiving combination. The IMF is asking governments to fix the roof and the sun isn’t shining.

Have you heard our new podcast Talking Politics? Tom, Robert and Anushka dig into the biggest issues dominating the political agenda in every episode…