Chancellor Kwasi Kwarteng must use an October 31 statement on government finances to abandon parts of his proposed tax cuts that caused a "market malfunction" in the UK financial system, the IMF's chief economist said on Tuesday.
“Our advice is that fiscal policy should be cognisant and should be as close to neutral,” Pierre-Olivier Gourinchas said. “In the UK we’ve seen market malfunction and there has been a need for the Bank of England to come in and address that malfunction.
Mr Kwarteng has been told to find spending cuts of more than £60 billion ($66bn) if he is to meet his target to get public finances back under control but there is also increasing pressure to climb down from his projected cuts.
The Institute for Fiscal Studies (IFS) said it was not possible to deliver cuts on that scale through efficiency savings and “trimming the fat” and that it would require major cuts to public services.
“It is very clear that stability can be improved in the financial markets and more broadly with a fiscal package that is consistent with what the Bank of England is trying to do," Mr Gourinchas said.
The Bank of England stepped in with emergency action for the second day running to head off a “fire sale” of UK government bonds after market turmoil triggered by the chancellor’s mini-budget announcement.
The IMF added in its latest World Economic Outlook report that the slowdown of the global economy has intensified since April amid “stubbornly” high inflation.
In the UK, the economy is projected to grow at a rate of 3.6 per cent in 2022, a 0.4 per cent upgrade from the IMF’s previous forecast in July.
However, growth will then fall sharply to only 0.3 per cent in 2023, with the IMF downgrading its forecast by 0.2 per cent from 0.5 per cent.
Only Germany and Italy will see weaker growth than the UK among the world’s advanced economies, with the IMF forecasting a decline for both countries in 2023.
Russia’s economy is expected to contract by 2.3 per cent next year, the biggest fall of all the nations included in the projections.
The UK and other countries have recently increased base interest rates to help tame surging inflation, making borrowing more expensive for households and businesses.
The Bank of England’s interest rate is currently 2.25 per cent and is expected to be raised further at the next meeting of decision-makers in November.
This is set to take a toll next year as consumers cut back on spending and businesses investment less, resulting in slower growth, the IMF said.
The body noted that its forecast was prepared before the government unveiled its mini-budget, which set out sweeping tax cuts including on stamp duty and income tax.
It said: “The fiscal package is expected to lift growth somewhat above the forecast in the near term, while complicating the fight against inflation.”
