International Monetary Fund Urges UK To Reverse Huge Tax Cuts. Here's Why It Matters

Chancellor Kwasi Kwarteng leaves 11 Downing Street to make his way to deliver his mini-budget. (Photo: Aaron Chown via PA Wire/PA Images)
Chancellor Kwasi Kwarteng leaves 11 Downing Street to make his way to deliver his mini-budget. (Photo: Aaron Chown via PA Wire/PA Images)

Chancellor Kwasi Kwarteng leaves 11 Downing Street to make his way to deliver his mini-budget. (Photo: Aaron Chown via PA Wire/PA Images)

The International Monetary Fund has made a stunning intervention over the state of the UK economy after the Tory mini-budget caused financial turmoil.

In the group’s first public reaction to Britain’s growing crisis, the IMF said on Tuesday that it would urge the UK to “re-evaluate” a massive £45 billion tax cut funded by government borrowing as it does “not recommend large and untargeted fiscal packages” given soaring inflation across the world.

It went on to warn the measures will likely increase inequality, and urged more action to hep those affected by the energy crisis and rising cost of living.

What is the IMF? Why do their comments matter?

The Washington DC-based “lender of last resort” has helped bail-out struggling nation states around the world for more than 70 years. But it is extremely rare for the organisation to intervene in a developed country’s economic policy.

Britain was forced to apply for an IMF loan of nearly $4 billion during the 1976 financial crisis, with the fund’s negotiators insisting on deep cuts in public expenditure at the time. The bailout has long been regarded as a low point of modern British economic history.

IMF officials have warned repeatedly in recent months of the need to carefully calibrate fiscal and monetary policy as central bankers raise interest rates across the globe to get inflation under control.

Against a backdrop of the pandemic, Russia’s invasion of Ukraine and rising global interest rates, the organisation’s lending has hit a hit a record high at $14billion, the FT reported. Zambia and Sri Lanka, which both defaulted in the pandemic, are currently negotiating IMF bailouts as part of efforts to restructure debts.

What is it responding to?

The IMF comments followed the Tories unveiling a controversial mini-budget on Friday that was designed to reboot growth  – a move that saw the pound slump to a record low against the dollar by Monday.

The sell-off of sterling, as well as jitters across the financial markets, has led to fears the Bank of England is certain to raise interest rates dramatically to save the currency, which in turn is likely to spell bad news for homeowners.

Chancellor Kwasi Kwarteng responded by saying he would set out medium-term debt-cutting plans on November 23, alongside forecasts from the independent Office for Budget Responsibility of the full scale of government borrowing.

What did the IMF say?

The IMF said the proposals, which sent the pound to touch an all-time low of $1.0327 on Monday, would likely increase inequality and it questioned the wisdom of such policies.

“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,” an IMF spokesperson said.

“We are closely monitoring recent economic developments in the UK and are engaged with the authorities,” the spokesperson said.

The IMF understands that Britain’s “sizable fiscal package” was intended to help residents deal with higher energy prices and to boost growth via tax cuts and supply measures, but such measures could put fiscal policy at cross purposes with monetary policy, the spokesperson said.

The fund said a budget due from Kwarteng in November would provide an “early opportunity for the UK government to consider ways to provide support that is more targeted and reevaluate the tax measures, especially those that benefit high-income earners.”

What has the reaction been?

The BBC’s economics editor Faisal Islam said: “The IMF telling a G7 member and major shareholder to ‘re-evaluate’ their signature economic policy because it ‘does not recommend’ such packages and will ‘increase inequality’… suggests profound international concern in finance ministries about a global impact of UK crisis.”

In response to the criticism, a Treasury spokesperson 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 (Vladimir) Putin’s illegal actions in Ukraine.

“Our Energy Price Guarantee saves households £1,000 on average and we’re halving business energy bills through the Energy Bill Relief Scheme.

“We are focused on growing the economy to raise living standards for everyone and the Chancellor has announced he will publish his medium-term fiscal plan on November 23 which 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.”

This article originally appeared on HuffPost UK and has been updated.