Urgent need to cut borrowing means help with cost of living pressures must be ‘sparing’, fund says
Daoly Telegraph 13/10/26
The International Monetary Fund (IMF) has warned against unfunded giveaways to ease cost of living pressures before John Healey’s maiden Budget.
A fortnight before the Chancellor’s first major tax-and-spending event, the IMF downgraded its outlook for UK growth and warned of further price rises and job losses.
While the fund did not issue a direct warning to Britain, it said an “urgent” need to bring down borrowing meant help with cost of living pressures should be used “sparingly” in all countries.
It also called for any measures to be “well funded” to maintain credibility.
In his first week as Prime Minister, Andy Burnham removed VAT from electricity bills at a cost of £850m and capped bus fares at £2.
The Chancellor has said he will use the Budget to provide more “breathing space” to households and businesses. The Treasury is working on a targeted, temporary scheme to cut energy bills that will be limited to benefit-claimants.
However, Mr Healey is also under pressure to continue a 16-year freeze on fuel duty and extend caps on prescription charges and rail fares introduced by Rachel Reeves, his predecessor.
The IMF warned that “broad-based fuel subsidies” or attempts to control prices would pile further pressure on public finances and could make it harder to bring down borrowing costs.
“Any new spending increases or tax cuts should be well-funded to secure the necessary fiscal adjustment paths,” the IMF said in its latest world economic outlook on Tuesday.
“Fiscal support measures should be used sparingly, designed in a way not to complicate the task of monetary policy, and unwound rapidly as the shock dissipates.”
While many of the Chancellor’s cost of living measures are likely to be temporary, the IMF warned that short-term giveaways were always “politically difficult to withdraw once introduced”.
While it did not point to any specific policies in the UK or elsewhere, fuel duty in the UK has been frozen since 2010 at a cumulative cost of more than £120bn.
The IMF’s warnings were echoed by the Resolution Foundation, which cautioned against Liz Truss-style blanket energy subsidies that would fuel inflation.
The think tank called for the Government to hand a £175 energy bill discount only to low-income households, at a cost of £2bn.
It also suggested that Mr Healey would need to impose £8bn of tax rises and spending cuts in his Oct 28 Budget to rebuild his fiscal headroom to £20bn, a level the think tank deemed prudent.
In a stark assessment, the IMF warned that drastic cuts in public spending may be the only way to bring the finances of highly indebted economies back under control.
UK debt is currently running at 94pc of GDP. While this is lower than other G7 nations, such as France and the United States, the IMF warned that many countries could be forced to “rethink” which public services were affordable.
It warned that high-debt economies were increasingly “exposed” to bond market shocks, adding: “In [these] economies, the required adjustment may be larger than what has generally proved feasible in the past and may need to be complemented by deeper spending rationalisation through, among other things, a rethinking of the scope of government activity and growth-enhancing structural reforms.”
The IMF’s warning came just days after Andrew Bailey, the Governor of the Bank of England, said a failure to rein in public spending risked triggering a repeat of the bond market crisis seen in the wake of the Truss mini-Budget.
The speech has caused tension between Mr Bailey and No 10, where Mr Burnham’s aides felt the Bank Governor tried to “pile pressure” on Mr Healey and tried to “play politics” on spending decisions.
In an update to its forecast, the IMF said it now expected the UK economy to grow 1.2pc in 2027, down from a previous expectation of 1.3pc. It blamed “higher energy prices and long-term interest rates”.
Inflation is expected to rise to 3.3pc this year and remain above the Bank of England’s 2pc target until the end of 2027.
The fund also predicted that living standards would barely grow in the next two years in a blow to Mr Burnham’s pledge to deliver “growth in every postcode”.
Unemployment is expected to rise from 4.9pc to 5.3pc by the end of next year, implying a further 100,000 job losses.
However, the IMF did upgrade its UK growth outlook for 2026 and noted that the hit to the global economy from the war in the Middle East had been smaller than initially feared.
Responding on Tuesday to the IMF’s World Economic Outlook, Mr Healey said: “Conflict in the Middle East and Europe is hitting people in the UK and around the world.
“But Britain’s economy is showing strong international resilience in the face of these challenges: we’re forecast to be the joint second fastest growing G7 nation in 2026 and have the lowest deficit in the G7 by 2031.
“This week I will meet international finance ministers in Bangkok to discuss how we limit the impact of the conflicts on people and businesses, while maintaining strong fiscal discipline.”
Commenting on the forecasts, Andrew Griffith, the shadow chancellor, said: “The IMF have downgraded growth due to high energy costs and escalating borrowing.
“John Healey must tackle both in the Budget by getting Britain drilling in the North Sea and gripping out-of-control welfare spending.”
The IMF suggested that the Bank of England was more to blame for the recent rise in borrowing costs than fears about reckless government spending.
While Mr Burnham had triggered jitters in financial markets by saying he did not want to be “in hock” to the bond market, IMF analysis showed that three quarters of the increase in 10-year gilt yields had in fact been triggered by concerns about high inflation and Threadneedle Street’s ability to grip rising prices.
Robert Jenrick, the Reform economy spokesman, warned that Britain was “going bust”. He said: “Anyone with a brain cell knows we have to cut wasteful spending.
“The only way to get the economy going again is to lower taxes on workers and businesses.”
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