The International Monetary Fund has warned chancellor Jeremy Hunt not to make any pre-election tax cuts.
In its annual health check on the economy the IMF said the UK was approaching a “soft landing” from economic difficulties and highlighted that any rate cuts would need to “balance the risks of premature and delayed easing”.
The IMF also said it would have recommended against Hunt making his 2p cuts to national insurance last year and in the Budget.
It believed the UK will grow by 0.7 per cent this year rather than the 0.5 per cent it had estimated in its world economic outlook last month and has predicted a growth of 1.5 per cent in 2025.
The IMF said the next phase of monetary policy was going to ease, meaning the next question was when and how fast to cut interest rates.
It recommended the Bank of England to cut rates to 4.75 per cent or 4.5 per cent this year.
The IMF also warned of a £30bn hole in public finances that would need to be plugged by spending cuts or tax rises in order to stabilise debt.
It said Hunt would need to make some “tough choices” and recommended boosting revenue by broadening the VAT and IHT bases as well as reforming capital gains and property taxation.
While on the spending side it recommended indexing the state pension to cost of living increases thereby abolishing the triple lock.
In a post on ‘X’, Hunt said the report showed the UK was “really turning a corner”.
However, Lindsay James, investment strategist at Quilter Investors said the IMF had sought to bring the government “back down earth” with a “bump warning” that difficult choices lie ahead.
She said: “Encouraging the Treasury to expand the tax net to the tune of £30bn by re-working road taxation, broadening the VAT and inheritance tax base and reforming property taxation, the IMF want to see higher tax receipts to offset the challenge of a growing burden on the public purse, and one it does not believe the UK can currently afford.
“With taxation already at multi-decade highs at a time of crumbling service provision, news of potentially higher taxes simply to pay for departments at their existing service levels will be bleak reading to many.
“However, the writing has been on the wall for several years and should come as no surprise to the Treasury, which simply holds itself to fiscal rules that dictate it must bring down borrowing as a percentage of GDP over a rolling five-year basis, a D-day that continuously drifts away and leaves public finances in a permanent state of deniable distress.
“The question will be whether the government that takes the reins by early 2025 is ready to be honest with the public that the UK faces a difficult choice. Either accept higher taxes are here to stay, for effectively no improvement in service levels, or expect an awful lot less from the state.
