The International Monetary Fund has strongly cautioned Jeremy Hunt against reducing taxes in his upcoming March budget, emphasizing the importance of increasing funding for crucial areas of public spending instead.
The International Monetary Fund, based in Washington, revised their predictions for the UK and global economy. They questioned the feasibility of expected tax cuts without increasing borrowing or implementing spending cuts after the election.
The International Monetary Fund advised the chancellor to prioritize restoring the country’s financial state following the negative impact of the pandemic and conflict in Ukraine, in order to address increasing spending demands.
A representative from the IMF stated that in order to maintain excellent public services and make essential investments for growth and to reach net zero goals, there will be a greater need for spending in the medium term than what is currently outlined in the government’s budget plans.
Meeting these needs and maintaining the debt/GDP ratio will require creating more effective fiscal savings, which may involve making changes to the tax system.
The budget is anticipated to include a reduction in income tax by Hunt, however, the IMF has urged the chancellor to raise carbon and property taxes, address gaps in the taxation of wealth and income, and revamp the pensions triple lock. The IMF stated that, considering these factors, they do not recommend any additional tax cuts.
Hunt refused the IMF’s request. The chancellor stated, “The IMF anticipates growth to improve in the coming years, due to our implementation of the most substantial tax deductions for capital investments globally, as well as reductions in national insurance to enhance work motivation.”
It is currently too soon to determine if the budget will allow for additional decreases in taxes. However, we maintain the belief that strategic tax cuts can greatly contribute to increasing economic growth.
According to reports, Hunt cautioned the cabinet that the economy has significant structural flaws, resulting in smaller tax cuts compared to the autumn statement where he lowered national insurance contributions by two percentage points.
According to the Times, Hunt stated at a cabinet meeting that we may not have as much space for tax reductions as we did in the fall.
The International Monetary Fund announced that it predicts a growth rate of 0.5% for the UK in 2023 and 0.6% in 2024, which remains the same as the forecast made in October. Among the G7 industrialized nations, only Germany is expected to have a weaker growth rate.
According to the IMF, the expected decrease in inflation will increase consumer purchasing ability and they predict a 1.6% growth for the UK in 2025, which is slower than their previous forecast three months ago. The IMF also noted a reduction of 0.4 percentage points in growth for 2025 due to limited potential for recovery following recent revisions to output levels during the pandemic.
In 2020 and 2021, the Office for National Statistics increased their estimation of UK growth by a total of 1.8 points.
The International Monetary Fund (IMF) announced that the world economy is on track for a gradual slowdown, thanks to the efforts of central banks to combat inflation through interest rate adjustments.
The IMF has updated its projections for growth in 2024, noting that several major economies, such as the US, China, Russia, and India, have exceeded expectations in 2023. The organization was impressed by their resilience during this time.
According to Pierre-Olivier Gourinchas, the economic counsellor for the IMF, the global economy is showing signs of improvement. Inflation is decreasing and growth remains stable, indicating a smooth transition towards a soft landing.
Gourinchas has revealed information about the interim World Economic Outlook (WEO), stating that the IMF predicts a global growth rate of 3.1% in both 2023 and 2024. This represents an increase of 0.1 and 0.2 percentage points, respectively. However, he cautioned that although this is an improvement compared to the average growth rate of 3.8% in the 2010s, it is still considered slow and there is a possibility of potential disruptions in the future.
The International Monetary Fund (IMF) stated that the chances of a difficult economic downturn have decreased and potential risks to their predictions are equally distributed. There is a possibility of higher growth than anticipated if there is a decrease in inflation, leading to more extensive reductions in interest rates. Additionally, government spending may increase due to upcoming elections or productivity may improve thanks to advancements in artificial intelligence.
The IMF cautioned about potential risks such as the unstable state in the Middle East, the potential for stubborn inflation, and signs of overly optimistic expectations from investors regarding interest rate cuts by central banks in the current year.
Gourinchas stated that he was pleasantly surprised by the quick progress in the production aspect of the worldwide economy. He specifically noted the increase in participation in the workforce, the decrease in supply chain issues, and the lower costs of commodities and energy.
He cautioned that central banks should refrain from early easing, as it could reverse their hard-earned credibility and result in a resurgence of inflation.
On the other hand, Gourinchas stated that there is an increasing amount of pressure in sectors that are affected by interest rates, such as construction, and there has been a noticeable decrease in loan activity.
“It is imperative to also shift focus towards monetary normalization in due time, as some developing economies that are experiencing a decline in inflation have already begun to do so. Failing to take action could potentially harm growth and lead to inflation dropping below the desired target.”
I believe that the US, where inflation seems to be driven by demand, should pay attention to risks in the first category. On the other hand, the euro area, where the increase in energy costs has had a larger impact, should prioritize managing the second risk. In both situations, achieving a smooth landing may prove challenging.
The International Monetary Fund (IMF) releases two complete editions of the World Economic Outlook (WEO) annually, in April and October, and then revises its predictions in January and July. In the most recent interim WEO, the projected growth for the United States in 2023 was adjusted from 2.1% to 2.5%, while China’s growth was revised from 5% to 5.2%, India’s from 6.3% to 6.7%, and Russia’s from 2.2% to 3%.
The European Union’s economy, on the other hand, did not fare as well in 2023 as previously predicted and its growth has been adjusted downward by 0.2 percentage points to 0.5%.