The Chancellor could be left at risk of breaking her fiscal rules by unexpected economic shocks and faces “significant challenges” in delivering the Government’s agenda, the International Monetary Fund (IMF) has warned.
The IMF said the UK’s “limited” so-called headroom on its public finances gave little room to manoeuvre and called on Rachel Reeves to consider some tax changes or spending cuts.
In its annual report on the UK economy, the IMF said: “Risks to this strategy must be carefully managed.
“In an uncertain global environment and with limited fiscal headroom, fiscal rules could easily be breached if growth disappoints or interest rate shocks materialise.”
The IMF praised the Government’s fiscal plans, saying they “strike a good balance between supporting growth and safeguarding fiscal sustainability”.
It added that the pro-growth agenda “covers the right areas to lift productivity”.
But the IMF cautioned that “delivering on this agenda will require overcoming significant challenges” amid the fallout from US President Donald Trump’s trade war.
“Shockwaves from trade policies and rapid geopolitical developments are affecting global growth and creating heightened levels of volatility in financial markets,” it said.
Added to this, it said, “fiscal space is limited and constrained by an elevated interest burden and increasing demands on public resources, including defence and aging-related spending”.
Ms Reeves said the report “confirms that the choices we’ve taken have ensured Britain’s economic recovery is under way, and that our plans will tackle the deep-rooted economic challenges that we inherited in the face of global headwinds”.
“Our fiscal rules allow us to confront those challenges by investing in Britain’s renewal,” she said.
The Washington-based IMF also recommended cutting the number of assessments of whether the Government is on track with its fiscal rules by the Office for Budget Responsibility (OBR) from two to just once a year, ahead of the autumn budget.
This could “reduce pressure for overly frequent changes to fiscal policy”, it said.
The Chancellor’s headroom against her main fiscal rule was estimated at £9.9 billion at the time of the spring statement in March.
But the Government’s U-turns on planned cuts to spending since then, such as changes to the welfare bill, are seen as having wiped this out, according to experts.
This has raised fears that Ms Reeves will be forced to raise taxes or cut spending in the autumn budget.
The IMF left its forecasts unchanged for the economy to grow by 1.2% this year and 1.4% in 2026.
However, it added a note of caution, saying that “risks to growth remain to the downside”.
“Tighter-than-expected financial conditions, combined with rising precautionary saving by households, would hinder the rebound in private consumption and slow the recovery,” the IMF said.
Shadow chancellor Sir Mel Stride said: “This is yet more confirmation that Labour’s mismanagement means that yet more tax rises are coming in the autumn.”
