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Rishi Sunak has been warned by the IMF to take much tougher action to rein in the UK’s public debt, putting a question mark over the prime minister’s cuts to national insurance.
The IMF on Wednesday listed the UK in its Fiscal Monitor publication as one of four large economies that “critically need to take policy action to address fundamental imbalances between spending and revenues”.
The fund predicted further increases in the UK’s ratio of net debt to GDP from 92 per cent today to 98 per cent by the end of the decade. It also urged the US, China and Italy to take action on debt.
The IMF warned of the risk of “fiscal slippage” around the world given this year’s large number of elections, which are often associated with looser budgetary policy ahead of polling day.
UK chancellor Jeremy Hunt told the Financial Times this week that the government would like to cut taxes in an autumn fiscal event “if we can”. He has vowed to go further if the Tories win the general election expected this year by eventually scrapping NI contributions.
Sir Keir Starmer, Labour leader, on Wednesday said the plan to abolish NI would cost £46bn a year and was completely unfunded, drawing parallels to former premier Liz Truss’s disastrous “mini” Budget, which included £45bn of unfunded tax cuts.
Starmer claimed Sunak would be forced to cut spending on state pensions or the NHS, or put up income tax to fund the policy. “Which is it?” he said at prime minister’s questions time.
Sunak insisted the policy would only be delivered when it was affordable. Downing Street added that the plan was “a long-term ambition” to eliminate NI contributions by workers, which have been cut from 12 per cent to 8 per cent by Hunt in two recent fiscal events.
Tory officials said they hoped to make “significant progress” in the next parliament but insisted any reductions would be fully costed and funded.
Sunak also on Wednesday launched a stinging attack against his predecessor Truss, signalling how he will seek to distance his administration from her damaging economic legacy in the election campaign.
He criticised Truss’s economic prospectus twice during heated exchanges in the House of Commons and said he warned against her proposals when he unsuccessfully challenged her for the Conservative leadership in 2022.
“I did have the stomach to argue out loud about her economic policies, have the conviction to say they were wrong,” Sunak told MPs, after Starmer said Truss had crashed the UK economy.
Sunak’s comments followed the publication this week of Truss’s memoir about her time in Number 10, in which she has defended many of her economic proposals.
The IMF previously warned Hunt in January against cutting taxes in his March Budget because of the need to curb borrowing and prioritise spending in areas such as health and education.
The IMF on Wednesday questioned Hunt’s latest 2p cut to NI in March, saying that even while it had been “part-funded by well-conceived revenue raising measures”, the action could worsen its public debt trajectory in the medium term.
“Population ageing and labour market mismatches are further expected to exert pressure on fiscal positions,” the fund said. Though its projection for UK debt to GDP hitting 98 per cent by the end of the decade would still leave the country below the US, Italy and France, the IMF was concerned about the direction of the UK’s debt position.
The Conservatives, currently trailing Labour by 20 points in the polls, have touted the outright abolition of NI as a massive tax simplification that would help make work pay.
The Tories’ existing tax and spend plans include a pledge to increase day-to-day departmental spending by 1 per cent a year overall in real terms after the election. The trajectory could mean harsh cuts in some departments given promises of bigger increases in areas including healthcare.
Global momentum to bring fiscal balances back to pre-pandemic levels has “faltered”, the IMF said.
“Decisive fiscal consolidation efforts are needed to safeguard sustainable public finances and rebuild fiscal buffers in a context of elevated public debt, slowing medium-term growth prospects, and still high interest rates,” the IMF said.
It added that delaying efforts to strengthen public finances “could increase vulnerabilities and limit fiscal space to deal with future crises, potentially leading to a more painful fiscal adjustment and adverse financial consequences”.