The International Monetary Fund (IMF) has urged the British government to reconsider its new financial plan, which includes significant tax cuts funded by government borrowing.
According to the IMF, the plan will increase socioeconomic inequality within the country. It may also undermine the current monetary policy implemented by the Bank of England to battle domestic inflation.
“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,” IMF said.
The IMF added that it “closely” monitored the economic developments within the U.K. and engaged with the country’s authorities.
Last Friday, Chancellor of the Exchequer Kwasi Kwarteng announced that Britain would implement its Growth Plan next year, reducing the basic income tax to 19 percent and maintaining corporate tax at the same 19-percent rate. The announcement came amid the increase in energy costs. The country is expected to apply for its largest loan since 1972 to fund this project, predicted to cost around £50 billion (approximately $53 billion).
The statement faced international backlashes and resulted in the steepest plunge of the pound sterling against the U.S. dollar on Monday. The currency went down by 4.9 percent to $1.0327, its lowest point in history. The bond prices also went down sharply after the announcement.
In the past few months, IMF officials have consistently warned countries to consider their monetary policies as central banks are raising interest rates to manage inflation. The IMF insisted governments must ensure that only the poorest households receive the fiscal packages.
Responding to the market situation, Kwarteng said the U.K. government would introduce “medium-term fiscal plans” in the upcoming finance meeting on November 23. The IMF welcomed Kwarteng’s statement and said it was an “early opportunity” for the government to prepare “more targeted” fiscal packages.
Responses from other institutions
Credit rating agency Moody’s CreditView called the British tax cut plan “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 agency said.
Regarding IMF’s statement on the British new fiscal plan, former U.S. treasury secretary Larry Summers said that the international institution usually warns emerging markets and not an established economy like Britain.
“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.
The Bank of England announced that the institution was ready to hike interest rates to curb inflation. Economists, however, predicted that the sterling would continue its plunge—with steadily rising borrowing costs—unless the British government announced that it would reverse or reformulate its Growth Plan.
“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,” a Treasury representative said.