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IMF upgrades UK growth forecast but issues fresh warning on national insurance cuts and debt
The International Monetary Fund (IMF) has said the UK economy is heading for a “soft landing” but reiterated its message to Jeremy Hunt that he should not have cut national insurance at the last two fiscal events.
In its annual check-up on the state of Britain’s economy, the Washington-based Fund also warned of a black hole in the public finances, with £30bn of spending cuts or tax rises needed to stabilise the national debt.
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The fund raised its forecast for gross domestic product growth this year from 0.5% to 0.7%, saying: “The UK economy is approaching a soft landing, with a recovery in growth expected in 2024, strengthening in 2025.”
It now expects inflation to come down to close to 2% in the coming months, and the Bank of England to cut interest rates by as much as three-quarters of a percent this year, and then another percentage point next year.
The chancellor welcomed the fund’s article IV report, saying: “Today’s report clearly shows that independent international economists agree that the UK economy has turned a corner and is on course for a soft landing.
“The IMF have upgraded our growth for this year and forecast we will grow faster than any other large European country over the next six years – so it is time to shake off some of the unjustified pessimism about our prospects.”
However, the IMF – which has warned the government explicitly in the past not to cut taxes too fast in the face of rising spending projections in future – said that the two 2p national insurance contribution (NIC) cuts at the last two fiscal events were a mistake.
“In light of the medium-term fiscal challenge,” the report said. “Staff would have recommended against the NIC rate cuts, given their significant cost.”
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The fund’s staff also believe that the government is not on track to meet its main fiscal rule, which commits it to cutting the national debt in five years time.
It believes net debt will carry on rising towards 97% of GDP in the following years, instead of falling back to 93% of GDP, as the Office for Budget Responsibility has forecast.
The fund’s double-edged report comes amid improving news for the UK.
Data released two weeks ago showed the country ended its short-lived recession with faster-than-expected growth in the first quarter of the year.
The Office for National Statistics is also expected to announce tomorrow that inflation dropped down close to the Bank of England’s 2% target in April.
That may enable the Bank to begin cutting interest rates from their 5.25% level in June or August.
The fund’s report contained a number of other recommendations for economic policy in the UK, including that the Bank of England should commit to more press conferences to explain its decisions, and that the government should consider imposing road charges to replace the revenue lost from fuel duty as electric cars become more predominant on UK roads.