The International Monetary Fund has launched a stinging attack on the UK’s tax-cutting plans and called on Liz Truss’s government to reconsider them to prevent stoking inequality. In rare public criticism of a leading global economy, the Washington-based fund said Kwasi Kwarteng’s mini-budget risked undermining the efforts of the Bank of England to tackle rampant inflation amid the cost of living emergency.
It said a statement planned by Kwarteng for 23 November presented an “opportunity for the UK government to consider ways to provide support that is more targeted and reevaluate the tax measures, especially those that benefit high income earners”. The rebuke comes amid a growing international backlash over the chancellor’s £45bn of unfunded tax cuts, with the intervention from the IMF swiftly followed by sharp criticism from the credit rating agency Moody’s late on Tuesday. The US treasury secretary, Janet Yellen, also said the US was “monitoring developments very closely” in the UK. As one of the most influential adjudicators in global financial markets, which rates the creditworthiness of governments and corporations on behalf of large investors, Moody’s said the UK’s “large unfunded tax cuts are credit negative”. “A sustained confidence shock arising from market concerns over the credibility of the government’s fiscal strategy that resulted in structurally higher funding costs could more permanently weaken the UK’s debt affordability.” The intervention from the IMF is rare given the influence of the UK in the global economy, and as one of the organisation’s largest shareholders. Larry Summers, the former US treasury secretary, said such a warning shot from the IMF would be more usual for an emerging market economy than a country like Britain. He told the BBC’s Newsnight: “It is early days and things could change and economics is not an exact science, but I would certainly say that this has the look right now of a number of unforced errors.” Summers said earlier on Tuesday that he was surprised the IMF had not intervened since the mini-budget on Friday. The IMF has consistently warned countries to avoid universal bailouts in response to the energy price shock. It has argued that only the poorest households should be protected from higher energy bills and the extra costs from rising inflation to limit the impact on public borrowing. In a move just days after Kwarteng’s mini-budget, and after the pound fell to the lowest ever level against the US dollar at one point on Monday, the organisation said it was “closely monitoring recent economic developments in the UK” and was engaged “with the authorities”. “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,” the spokesperson said in the IMF’s first public reaction. Kwarteng cut the top rate of tax from 45p to 40p and promised a 1p cut in the basic rate of tax from April next year. He also said he would retain corporation tax at 19% – scrapping a planned rise to 25% – and reverse a recent rise in national insurance payments, saying that the near £50bn cost would be added to the UK’s debt pile. The move sent sterling and government bonds into freefall over the weekend and on Monday, despite Kwarteng arguing that the budget was aimed at growing the economy.
Kwarteng calmed markets by saying he would set out medium-term debt-cutting plans on 23 November, alongside forecasts from the independent Office for Budget Responsibility on the full scale of government borrowing. The Bank of England also issued a notice saying it stood ready to raise interest rates to bring down inflation. However, most analysts forecast that the pound would continue to fall and borrowing costs rise unless the government reversed at least some of its planned tax cuts. A Treasury spokesperson said: “Our energy price guarantee saves households £1,000 on average and we’re halving business energy bills. “We are focused on growing the economy to raise living standards for everyone and the chancellor has announced he will publish his medium-term fiscal plan on 23 November, which will set out further details on the government’s fiscal rules.”