The International Monetary Fund (IMF) has warned Britain faces ‘difficult fiscal choices’ if it is to meet ever increasing spending pressures. The fund predicted a surge in public spending, driven largely by commitments to welfare, health, and pensions.
According to the IMF, these policies will push public spending as a share of GDP up by 8 per cent by 2050. The message is clear: unless revenue is increased – i.e even more tax rises – the UK will need to confront ‘tough policy decisions’ about the future role of the state and the scale of public services it can afford to deliver.
Crucially, the IMF noted that the government’s ability to meet this challenge through borrowing is severely limited. With public debt already towering and borrowing costs elevated, there is ‘limited space’ for the Treasury to manoeuvre without risking fiscal instability.
Despite the stark warnings, the IMF offered some optimism by slightly upgrading its growth forecast for the UK economy in 2025 from 1.1 per cent to 1.2 per cent, while leaving its 2026 projection was unchanged at 1.4 per cent. It also expressed confidence in Rachel Reeves’s current fiscal plans, describing them as ‘credible and growth-friendly’ and commending the government’s broader ‘Growth Mission’.
Interestingly, the IMF also appeared to give Reeves some much-needed political cover on the UK’s fiscal rules. Reeves has repeatedly insisted that her fiscal framework was ‘ironclad’ and non-negotiable. However, the IMF hinted that a more flexible interpretation of the rules might be both desirable and pragmatic.
To reduce market volatility and constant changes to tax and spend polcies, the Fund suggested that the government consider allowing minor breaches of fiscal rules without triggering immediate corrective action. Another option would be to limit the frequency of fiscal assessments – perhaps to just once a year – easing the pressure of short-term forecast fluctuations that lead to ‘intense market and media scrutiny’.
Such advice may be welcome. Just last week, Oxford Economics issued a stark warning that Reeves’s tiny £9.9 billion of fiscal headroom is likely to be wiped out entirely, potentially forcing the Chancellor into difficult decisions sooner than she’d hoped.
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