IMF urges Reeves to raise taxes and tame spending in her budget

Rachel Reeves, the chancellor, must push ahead with tax increases and reform government spending in the budget to stabilise the UK’s public finances, the International Monetary Fund has warned.
In a pre-released chapter in its forthcoming Fiscal Monitor report, the IMF singled out Britain and the United States for borrowing at a much faster rate than before the pandemic and for potentially being unable to sustain their debt burdens.
The organisation, based in Washington, said: “With debt risks elevated in most countries and debt growing at a faster pace than in the pre-pandemic years in large countries (United Kingdom, United States), postponing adjustments would only make the required correction larger.”
The chancellor is expected to increase a range of taxes at her first budget on October 30, potentially including subjecting employers’ pension contributions to national insurance and raising the main rates of capital gains tax.
Although Reeves and Sir Keir Starmer have insisted that tough decisions are required to rebalance the public finances, the pair have also pledged to increase public sector investment to stimulate economic growth.
Reeves and Starmer have insisted they inherited a £22 billion hole in the public finances from the Conservatives. Under existing fiscal plans handed over by Jeremy Hunt, the former chancellor, unprotected government departments also face about £20 billion of real terms budget cuts.
The Institute for Fiscal Studies think tank has estimated that taxes need to rise by £25 billion a year for the government to prevent a return to austerity, which it has promised to avoid.
The IMF estimated that global debt is set to exceed $100 trillion, or 93 per cent of global GDP, this year and criticised politicians for failing to get a hold of their respective public finances.
“The political discourse on fiscal issues has increasingly tilted toward higher government spending in recent decades,” the body said. “Fiscal policy uncertainty has increased, and political red lines on taxation have become more entrenched.”
In its election manifesto, Labour ruled out lifting the main rates of income tax, national insurance and VAT, taxes which collectively generate about 75 per cent of public revenue.
The IMF added: “Spending pressures to address green transitions, population ageing, security concerns, and long-standing development challenges are mounting.”
Developed economies have significantly stepped up government spending and borrowing since the pandemic, most notably the US, which is on course to record a $1.8 trillion deficit this year, largely thanks to manufacturing subsidies offered under the Inflation Reduction Act.
Michel Barnier, the French prime minister, unveiled a budget this month that included about £60 billion of tax rises and spending cuts to restrain what he described as the country’s “colossal” debt load. France’s deficit is around 6 per cent of GDP, above the European Union’s recommended ratio.
The IMF said there is “a strong case for fiscal policies to prioritise debt sustainability and rebuild fiscal buffers, now rather than later.”
The Treasury was contacted for comment.