LONDON: UK Chancellor of the Exchequer John Healey has received a warning from the International Monetary Fund (IMF) ahead of his budget this month: use cost-of-living support “sparingly” or risk reigniting inflation.
In its World Economic Outlook (WEO) published yesterday, the global watchdog said debt-burdened countries like the United Kingdom should restrict any relief to “targeted and temporary” measures that do not make the job of taming prices more difficult.
“Rebuilding fiscal space is urgent, given elevated debt, higher borrowing costs, multiplying demands on public budgets, and heightened uncertainty,” it said.
“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.
“The United Kingdom will grow more than previously thought and is less exposed to the Iran war energy shock than other major economies,” the IMF said.
However, Britain and others still need to reduce borrowing to stabilise public debt and “contain the immediate risks from inflation”.
The call for caution adds to the pressure on Healey, who is said to be preparing a series of time-limited giveaways to help voters with the cost of living at the budget on Oct 28.
On Monday, the Institute for Fiscal Studies urged the chancellor to set out how he would pay for a £35bil spending shortfall or lose credibility in financial markets.
The IMF forecast, which assumes the Strait of Hormuz reopens in March and is back to normal next October, sees inflation averaging 3.3% this year and 2.8% in 2027.
Money markets are expecting the Bank of England (BoE) to start raising interest rates in November to get inflation back to the 2% target.
The IMF forecasts painted a relatively positive picture for the United Kingdom.
Growth is near the top of the Group of Seven or G7, inflation is forecast to come under control faster than the United States and the European Union, and the United Kingdom is close to putting the public finances on a sustainable footing – albeit with debt at a roughly 60-year high of 94% of gross domestic product (GDP).
GDP growth was upgraded to 1.3% from 1% for 2026 and cut slightly to 1.2% from 1.3% in 2027 “as higher energy prices and long-term interest rates weigh on consumption and investment”.
The net two-year upgrade was the third largest in the G7, behind Germany and Italy, though the United Kingdom fares worse on a per-person basis.
GDP per head expands 0.7% in 2026 and 0.9% in 2027, the same across the two years as Italy and better than France.
Charts in the WEO showed that there was little evidence of second-round effects hitting inflation so far, with the core measure that strips out volatile food and energy prices returning to 2% by the end of 2027, six months before the eurozone and the United States.
Fiscal consolidation would help, as it “can moderate demand and complement monetary policy efforts to maintain price stability”. A separate chart showed the UK government is this year expected to reduce borrowing to a level roughly in line with the “debt stabilising primary balance” that would prevent the debt spiralling upwards.
The United States, Germany, France and Italy all have a lot more work to do.
However, the fund indicated that more consolidation may be required in the United Kingdom, as “increasing pressures for spending on defence, among other things”, could derail the fiscal outlook.
“Broad-based fuel subsidies, generalised tax cuts, and price controls should be avoided,” it said.
“These measures are typically poorly targeted, fiscally costly, distortionary, and politically difficult to withdraw once introduced.”
The IMF said rates are likely to rise in the United States and the eurozone, but there was no suggestion that the BoE will need to follow suit.
It has argued that rates at 3.75% are already bearing down on prices. — Bloomberg
