IMF Warns UK Over Fiscal Risks as Pressure Mounts on Chancellor
The International Monetary Fund has cautioned that the UK government could struggle to meet its deficit reduction targets unless Rachel Reeves adjusts fiscal plans to allow more flexibility, either through tax changes or spending measures.
In its final annual assessment of the UK economy, the Washington-based institution stated that recent modifications to deficit reduction strategies had improved the credibility and effectiveness of fiscal policy.
"These plans still carry risks that must be carefully managed. Given global uncertainty and minimal fiscal leeway, unexpected weak growth or interest rate shocks could lead to breaches in fiscal rules," the IMF noted.
The report also suggested that frequent tax and spending revisions could be minimized if more budgetary flexibility were introduced to help the chancellor meet her objectives.
"The optimal approach would be maintaining greater fiscal buffer under the rules, so minor economic shifts don’t disrupt compliance assessments," it added.
The IMF highlighted that boosting growth, as Reeves aims to do, presents major difficulties due to tight finances, extensive reforms, and external volatility exacerbated by global trade tensions under US leadership.
In its May review, the IMF had recommended refining fiscal rules to avoid sudden austerity measures. Since then, the government’s reversal on welfare policy has strained public finances further, adding pressure ahead of a difficult autumn budget. Speculation is growing that significant tax hikes may be needed.
Responding to the report, Reeves said the IMF supported her strategy for economic recovery, emphasizing her plans would address "long-standing economic challenges inherited amid global instability."
Reeves faces mounting pressure to increase taxes later this year to stay on track with financial targets, following earlier rises in employer social security contributions and revenue measures introduced in late 2024.
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