IMF: Britain’s tough choices on taxes and spending – Al-Mareeq Al-Iqtisadiah

The United Kingdom, whose new Labour government has just taken office, will have to make crucial decisions and make “tough choices between taxation and spending” because of the country’s high level of public debt, the International Monetary Fund said in its annual update on the UK’s economic and financial situation, published on Monday, just days after Labour’s landslide election victory on Thursday, July 4.

“The biggest challenge in the medium term from a fiscal point of view will be to better take into account the needs that will determine public spending and achieve real debt stabilization,” point out the Fund experts, who nevertheless recognize the need to achieve financial stability. Large public investments in the country, especially in the health sector “in a context of chronic underfunding of the national health service and an aging population.”

The next day of the city and the financial industry

The stated intention and promise of Keir Starmer’s new government is to increase public spending on health, education and infrastructure, a process that the Labour government believes will improve the daily lives of citizens, while at the same time stimulating development and employment.

“take action”

The IMF gives the green light to “ambitious structural reforms to boost the country’s development potential”. But at the same time it stresses the need to keep public debt under control, which “is close to reaching 100% of GDP in the UK” (in fact it was 97.9% in April). The Fund also stresses the need to reduce the fiscal deficit, which, despite having fallen this year after the pandemic, remains at an “unsustainable” 4.4%.

Among possible measures to address this dual challenge, the IMF suggests that the UK government explore ways to boost state tax revenues. It cites, for example, higher carbon taxes, higher inheritance and estate taxes, or broadening the base of value-added tax and increasing its rates. Of course, a Labour government will not decide to increase indirect taxes that would hurt small and medium-income earners, the party’s central vote bank.

IMF warns

A country’s financial picture improves when savings are created and the economy grows faster. That is, ultimately, the goal of the Starmer government (“growth, growth, growth” is its economic trinity). It is also their central idea. First remarks from Finance Minister Rachel ReevesThis has highlighted the need to boost growth through investment in infrastructure such as wind power and housing, as many of the country’s major cities (not just London) face a huge housing problem.

However, the IMF has expressed reservations about the UK economy’s ability to recover and maintain high growth rates in the long term. The Fund describes the country’s long-term growth potential as “moderate”, with reasons for this: low labour productivity, an ageing population, and a large number of people of productive age who are not in the labour market – many of whom have never worked in their lives or have decades of professional work, meaning they are unemployed.

The value of immigration

The fund stresses that this situation can be compensated for by increasing immigration, i.e. by receiving a greater number of economic migrants. The flow of workers to Britain has fallen significantly since Brexit, and moreover, opening the British borders to migrants is not something that interests the Conservative Party and its voters.

The Labour government has already announced reforms in this area, primarily to facilitate the movement of goods, services and people between Britain and the EU. As a former colonial power, Britain has a large influx of workers, often with impressive training and skills, and of course English speakers, from India, Pakistan and other countries of the former British Commonwealth.

Stagflation

The IMF notes that “if the recovery in growth is slow and the Bank of England targets inflation again, UK public finances will not improve.” Fund experts are clearly concerned about the possibility of inflationary pressures resurfacing in the UK, which would prompt the Bank of England to respond.

Specifically, the IMF expects the consumer price index to rise slightly to 2.5% by the end of 2024, which it hopes will be “transitory.” As for the economy, after 2023 when UK GDP growth was almost zero, the fund expects growth of 0.7% this year. But it remains optimistic that growth will accelerate to 1.5% in 2025 and to 1.7% in 2026.

No one is calling for change because of any failure in the long-term forecasts of the Fund’s analysts, who are waiting anyway to see the first financial decisions of Rachel Reeves’s staff, and certainly the first Labour government budget, to judge them more accurately. And in their subsequent analysis, the autumn.