The UK economy is on track for a “soft landing”, according to the International Monetary Fund (IMF). However, the organization has reiterated its message to Chancellor of the Exchequer Jeremy Hunt that the national insurance cuts made at the last two fiscal events were a mistake.
In its annual assessment of the UK’s economy, the IMF warned of a potential black hole in the public finances, with the need for £30 billion in spending cuts or tax increases in order to stabilize the national debt. The IMF also raised its forecast for gross domestic product (GDP) growth this year from 0.5% to 0.7%, stating that “the UK economy is approaching a soft landing, with a recovery in growth expected in 2024, strengthening in 2025.”
The organization also expects inflation to decrease to near 2% in the coming months, and predicts that the Bank of England will cut interest rates by as much as three-quarters of a percent this year, followed by another percentage point next year. Chancellor Hunt welcomed the IMF’s article IV report, stating, “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.”
However, the IMF has previously warned against cutting taxes too quickly in the face of projected increases in spending, and the organization believes that the two 2p national insurance contribution (NIC) cuts made at the last two fiscal events were a mistake. “In light of the medium-term fiscal challenge,” the report stated, “staff would have recommended against the NIC rate cuts, given their significant cost.”
The IMF also expressed doubt that the government will be able to meet its main fiscal rule of reducing the national debt in five years. The organization predicts that the debt will continue to rise towards 97% of GDP in the coming years, rather than falling to 93%, as forecasted by the Office for Budget Responsibility.
This report from the IMF comes at a time of improving economic news for the UK. Recent data showed that the country emerged from its short-lived recession with stronger-than-expected growth in the first quarter of the year. Furthermore, the Office for National Statistics is expected to announce tomorrow that inflation has dropped close to the Bank of England’s target of 2% in April, potentially paving the way for interest rate cuts from the current level of 5.25%.
In addition to its assessment of the UK’s economy, the IMF provided several recommendations for economic policy. These included suggesting that the Bank of England hold more press conferences to explain its decisions, and proposing that the government consider implementing road charges to replace lost revenue from fuel duty as electric cars become more prevalent on UK roads.
