Jeremy Hunt is preparing a pre-election cut in national insurance despite a warning from the International Monetary Fund of a looming £30bn hole in the public finances, Downing Street has indicated.
Rishi Sunak’s spokesperson said the government rejected the IMF’s argument that there was no room for a third cut in NI in less than a year and that the Treasury should instead be thinking about tax increases or spending cuts.
“I think on that we respectfully disagree with the IMF,” the spokesperson said. “My view is that cutting national insurance, rewarding work, is an important part of growing the economy.”
Downing Street was responding to the release of the IMF’s annual health check on the UK in which it said “difficult choices” lay ahead.
Speaking at a press conference, Kristalina Georgieva, the IMF’s managing director, said a cautious approach to tax cuts was needed because the pandemic and Russia’s invasion of Ukraine had damaged the public finances.
“We are genuinely concerned, not just for the UK, for all countries that have used fiscal buffers extensively, that they must do more to rebuild these buffers,” she said.
The IMF said it would have advised Hunt not to cut national insurance contributions (NICs) by two percentage points in last year’s autumn statement and March budget, and expressed strong doubts about the wisdom of the chancellor’s plans for another cut in NICs before polling day.
It said that in order to stop debt rising, the Treasury may need to consider a range of potentially unpopular revenue-raising measures including widening the scope of VAT, road pricing, scrapping the triple lock on the state pension, raising more from inheritance tax and capital gains tax, and wider user charges for public services.
Georgieva said the economy was on course for a “soft landing” after a faster-than-expected fall in the annual inflation rate and the end of last year’s shallow recession. The IMF believes the UK will grow by 0.7% this year rather than the 0.5% it had estimated in last month’s World Economic Outlook.
With the Bank of England contemplating whether to cut interest rates next month from their current 5.25%, the IMF said it saw scope for two or three 0.25 percentage point cuts in official borrowing costs this year.
But it said the longer-term growth prospects for the economy remained poor and that this – coupled with demands for better public services and “critical investment needs” – put pressure on the public finances.
A team of IMF officials has been in the UK for the past two weeks for the annual Article IV consultation and said in a concluding statement: “In light of the medium-term fiscal challenge, staff would have recommended against the NIC rate cuts, given their significant cost.
“But staff does recognise the potential labour supply benefits of the NIC cuts and that they were accompanied by well-conceived measures (eg reform of the ‘non-dom’ regime) that will partially offset their fiscal cost over the medium term.”
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The statement said that “as a general principle, staff would advise against additional tax cuts, unless they are credibly growth-enhancing and appropriately offset by high-quality deficit-reducing measures”.
Government plans involve day-to-day departmental spending rising by 1% a year when adjusted for inflation, and for investment spending to be flat. The IMF said these did not “sufficiently account for known pressures in public services (especially health and social care), and critical growth-enhancing investment needs (including for the green transition)”.
The IMF team said it was assuming higher increases – 2% real growth – in departmental spending, but that this would result in debt as a share of national income continuing to rise, reaching 97% of gross domestic product (GDP) by the end of the decade.
The IMF said that, to be certain of stabilising debt by 2029-30, the government would need to raise revenue or make savings equivalent to one percentage point of GDP – roughly £30bn – and that this would involve “tough choices”.
Hunt said: “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.”