The UK Government has been urged to ‘re-evaluate’ tax measures following a blistering statement from the International Monetary Fund (IMF).
Kwasi Kwarteng has stepped up efforts to defend his economic plans after the criticism came in late last night.
The IMF, an agency of the United Nations, announced it was ‘closely monitoring’ developments in the UK and was in touch with the authorities, urging the Chancellor to ‘re-evaluate the tax measures’.
It warned current plans, including the abolition of the 45p rate of income tax for people on more than £150,000, are likely to increase inequality.
Mr Kwarteng will today accelerate efforts to convince not just the nation, but now the world, that his mini-budget will succeed.
He is due to meet investment banks following days of turmoil which saw the pound buffeted and Government borrowing costs increase.
The crisis was triggered by Mr Kwarteng on Friday when he spooked markets by unveiling a package of tax cuts and increased borrowing in his mini-budget.
The IMF said in their statement: ‘We understand that the sizeable fiscal package announced aims at helping families and businesses deal with the energy shock and at boosting growth via tax cuts and supply measures.
‘However, 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.
‘Furthermore, the nature of the UK measures will likely increase inequality.’
It urged Mr Kwarteng to change course when he comes back to Parliament in November with a package intended to show how he will get the public finances back on track.
‘The November 23 budget will present an early opportunity for the UK Government to consider ways to provide support that is more targeted and reevaluate the tax measures, especially those that benefit high income earners,’ the IMF added.
In response to last night’s criticism a Treasury spokeswoman said: ‘We have acted at speed to protect households and businesses through this winter and the next, following the unprecedented energy price rise caused by (Vladimir) Putin’s illegal actions in Ukraine.’
The Government was ‘focused on growing the economy to raise living standards for everyone” and the Chancellor’s statement on November 23 ‘will set out further details on the Government’s fiscal rules, including ensuring that debt falls as a share of GDP (gross domestic product) in the medium term’.
The IMF comments comes as the Bank of England signalled it was ready to significantly ramp up interest rates to shore up the pound and guard against increased inflation.
The Chancellor has insisted he is ‘confident’ his strategy will deliver the promised economic growth.
But the Sterling nevertheless slumped to a record low against the dollar on Monday before recovering, and Mr Kwarteng has sought to convince City investors he has a ‘credible plan’ to start reducing the UK’s debt mountain.
Former US Treasury Secretary Larry Summers last night told Newsnight that Britain was facing a ‘very ominous’ combination of factors.
‘I can’t in all honesty remember a time when a set of policy announcements from a G7 country elicited so negative a response both from markets and from economic experts,’ he said.
‘When a country sees its interest rates rise by at some maturities, at some points of 4 percentage points in two days at the same time that its currency is falling in a major way, that is a sign that there has been a major loss of market credibility and market confidence.
‘That’s of course a kind of situation that demands the IMF’s attention, so it’s appropriate that the IMF is watching. I was frankly a little surprised not to hear from the IMF over the weekend.
‘The combination that Britain is facing is very ominous. I think that the kind of warning that Britain received from the IMF today is a kind of warning that comes much more frequently to emerging markets with new governments, than to a country like Britain.
‘The sense that something like this could be happening in a country like Britain may cause suspicions and doubts about what could happen in other countries. I have to say, and it is early days, 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.’
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