International Monetary Fund urges UK chancellor Kwasi Kwarteng to change course

Tax-cutting strategy likely to increase inequality, body says

The crisis was triggered by British Chancellor Kwasi Kwarteng mini-budget on Friday, when he unveiled a £45 billion ($47.96bn) tax cut funded by government borrowing. Reuters.
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UK Chancellor Kwasi Kwarteng has been urged to change course after his mini-budget spooked financial markets with its package of tax cuts and increased borrowing.

In an extraordinary statement, the International Monetary Fund said it was “closely monitoring” developments and urged the chancellor to “re-evaluate the tax measures”.

It said the current plans, including the abolition of the 45p ($0.47) rate of income tax for people on more than £150,000 ($159,800), are likely to increase inequality.

The pound dipped 0.95 per cent overnight against the dollar to $1.06, reversing a marginal 0.4 per cent gain it made on Tuesday.

Speaking on BBC Radio 4's Today programme on Wednesday, Adnan Mazarei, a former deputy director for the IMF, said the fund usually reserves such criticism for “emerging market countries with problematic policies … not often about G7 countries”, which are the seven richest nations in the world.

He said there was a fear the tax cuts are permanent.

White House economic adviser, Brian Deese said he was not surprised by the markets’ negative reaction to the tax-cutting mini-budget, adding it was important to focus on "fiscal prudence, fiscal discipline".

He said introducing tax cuts at a time of monetary tightening, when interest rates were being raised, means monetary policy may have to be tightened even further.

Labour Party leader Sir Keir Starmer said the criticism of the UK government's plan for tax cuts was "very serious".

"This was a step they didn't have to take," he told LBC radio.

"Quite often when the markets are jittery, when the pound falls, it's because of some international event — conflict in Ukraine, a cost-of-living crisis, energy crisis. This is self-inflicted by the government."

He said people were "very, very worried this morning".

"Their mortgages are going up. Some people who thought they had a mortgage arrangement last week now haven't got one."

The intervention came as the Bank of England signalled it was ready to ramp up interest rates to shore up the pound and guard against increased inflation.

The chancellor insisted he was “confident” his tax-cutting strategy would deliver the promised economic growth.

After a day of turmoil in the markets on Monday, during which sterling slumped to a record low against the dollar, the chancellor sought to reassure City investors that he has a “credible plan” to start reducing the UK’s debt mountain.

But the IMF said: “We understand that the sizeable fiscal package announced aims at helping families and businesses deal with the energy shock and at boosting growth via tax cuts and supply measures.

“However, given elevated inflation pressures in many countries, including the UK, we do not recommend large and untargeted fiscal packages at this juncture, as it is important that fiscal policy does not work at cross purposes to monetary policy.

“Furthermore, the nature of the UK measures will likely increase inequality.”

The International Monetary Fund says tax-cutting plans are likely to increase inequality in the UK. EPA.

It urged Mr Kwarteng to change course when he comes back to Parliament in November with another package, intended to show how he will get public finances back on track.

The US Treasury Secretary, Janet Yellen, said Washington was also “monitoring developments very closely” in the UK.

In response to the criticism, a Treasury spokeswoman said: “We have acted at speed to protect households and businesses through this winter and the next, following the unprecedented energy price rise caused by [Russian President Vladimir] Putin’s illegal actions in Ukraine.”

The government was “focused on growing the economy to raise living standards for everyone” and the chancellor’s statement on November 23 “will set out further details on the government’s fiscal rules, including ensuring that debt falls as a share of GDP [gross domestic product] in the medium term”.

The Bank of England’s chief economist Huw Pill said they “cannot be indifferent” to the developments of the past days — regarded as a signal the cost of borrowing will have to go up to protect the pound and keep a lid on inflation.

“It is hard not to draw the conclusion that all this will require significant monetary policy response,” Mr Pill said in a speech to the Barclays-CEPR International Monetary Policy Forum.

“We must be confident in the stability of the UK’s economic framework.”

After two days of big changes, the pound settled down on Tuesday, trading at about 1.08 dollars for most of the day, deviating only briefly with a two-cent drop.

London’s top stock index, the FTSE 100, was also subdued for most of the day.

But European markets dropped heavily right before close as the price of gas spiked.

The FTSE closed the day down 0.5 per cent on Tuesday afternoon and, worryingly for the government, gilt yields, reflecting the cost of borrowing by the state, rose 1.6 per cent, more than a quarter higher than a week ago.

But with some analysts predicting the base rate, currently standing at 2.25 per cent, will have to rise to as high as 6 per cent next year, some lenders began withdrawing mortgage products amid the uncertainty.

The crisis was triggered by Mr Kwarteng’s mini-budget on Friday, when he unveiled a massive £45 billion tax cut funded by government borrowing.

At a meeting on Tuesday with institutional investors, the chancellor emphasised the importance of the “supply-side” reforms ministers will be setting out in the coming weeks to boost growth, including his “Big Bang 2.0” reforms to further liberalise financial market regulation.

“We are confident in our long-term strategy to drive economic growth through tax cuts and supply-side reform,” he told them, according to a Treasury readout of the meeting.

His comments came amid reports that Prime Minister Liz Truss had initially resisted moves by the Treasury on Monday to announce the new medium-term fiscal plan to calm the markets.

Government sources did not deny the prime minister and chancellor had met to discuss the issue but insisted suggestions it had been an “argumentative” encounter and descended into a “shouting match” were wide of the mark.

Despite a calmer day on Tuesday, many Conservative MPs remain deeply concerned about the political fallout from the tumultuous start to Ms Truss’s premiership.

It is understood that Mr Kwarteng held a call with Tory MPs alongside Chief Secretary to the Treasury Chris Philp, as the chancellor sought to settle nerves among colleagues after the turbulence of recent days.

With a YouGov poll for The Times showing Labour opening up a 17-point lead, some MPs who did not support Ms Truss in the leadership contest have privately questioned whether she is up to the job.

Mel Stride, the chairman of the Commons Treasury Committee, who backed Rishi Sunak for the leadership, said the party’s reputation on the economy was “in jeopardy”.

He said the country was in “an extremely difficult situation”, with higher borrowing costs than Italy or Greece, and that it was essential to rebuild confidence following the chancellor’s “unfunded” tax promises.

“That really, I think, is the part that has spooked the markets, because those tax cuts have got to be paid for,” he told BBC Radio 4’s The World at One.

Updated: September 28, 2022, 8:28 AM