IMF urges UK to stay course on deficit reduction
The debt-laden UK economy needs to stay the course on deficit reduction and use cost-of-living relief sparingly or risk reigniting inflation, the International Monetary Fund warned on Tuesday. The warning comes just over two weeks before UK Chancellor of the Exchequer, John Healey, presents his first annual budget. It is important there is no slippage in the face of higher debt interest costs and…
The International Monetary Fund has cautioned the UK to persist with its deficit reduction efforts, asserting that sparingly using cost-of-living relief could inadvertently reignite inflation. This warning arrives just days before Chancellor John Healey unveils his first annual budget. IMF Chief Economist Silvana Tenreyro emphasized the importance of maintaining fiscal discipline amid rising interest costs and increased spending on defense and energy subsidies.
Tenreyro stated, "The UK has already started the [fiscal] consolidation path … It is on that trajectory, and the message for the UK is simply stay the course and continue on that trajectory."
The Chancellor is set to announce a series of time-limited measures to assist voters with the recent surge in living costs in the upcoming budget on October 28. However, the Institute for Fiscal Studies has urged the Chancellor to address a £35 billion gap in spending plans, warning that failing to do so could result in a "work of fiction."
The UK government recently ran a budget deficit of 4.4% of gross domestic product and aims to balance its budget by the 2029-30 fiscal year. Energy costs have been a significant concern, with the price of European gas surging over 150% this year, putting a strain on British consumers' wallets during the winter months. The current underground gas storage levels are at just 48% of capacity, compared to Portugal's 94% and Poland's 99%, highlighting the vulnerability of the UK's energy infrastructure.
The IMF's latest World Economic Outlook projected that UK inflation will rise to 3.3% this year and ease to 2.8% next year. The UK aims to bring inflation back to its 2% target, with the Bank of England expected to start raising interest rates from the following month. Rebuilding fiscal space is deemed "urgent" due to elevated debt levels, higher borrowing costs, and increasing demands on public budgets, amid a deteriorating global geopolitical landscape.
The IMF advises that support measures should be used sparingly, designed to minimize the impact on monetary policy, and rapidly unwound as the situation improves.
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