The International Monetary Fund (IMF) has urged the UK government to “reevaluate” its strategy to boost economic growth with massive tax cuts funded by borrowing, which has spooked the markets and caused the pound to plunge.
The British pound on Monday plunged by more than 4 percent to just $1.03, an all-time low. It recovered to about $1.08 on Tuesday, but fell back to $1.06 on Wednesday morning.
It came after Prime Minister Liz Truss’s new government unveiled the biggest package of tax cuts in half a century, which was aimed at spurring growth in the UK economy but caused panic among investors concerned about increased government borrowing.
Tax Cuts ‘Increase Inequality’
In a statement issued on Tuesday, the IMF said it understands that the UK measures were aimed 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,” it said.
It warned the current plans, including the abolition of the 45 percent rate of income tax for people earning more than £150,000 ($160,000) annually, are likely to “increase inequality.”
The IMF urged Kwarteng to change course when he comes back to Parliament in November with a package intended to show how he will get the public finances back on track.
Calming the Markets
In response, a UK 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 UK government is “focused on growing the economy to raise living standards for everyone” and the chancellor’s statement on Nov. 23 “will set out further details on the government’s fiscal rules, including ensuring that debt falls as a share of GDP in the medium term,” she added.
In an attempt to calm the markets, the Bank of England, the UK’s central bank, has said it would raise interest rates by “as much as is needed” to shore up the pound and keep a lid on inflation.
Talking to financial investors on Tuesday, Kwarteng said the government remains “confident” in its long-term strategy to drive economic growth through tax cuts and supply-side reform.
He also insisted that the government is “committed to fiscal discipline.”
