By DANICA KIRKA and JILL LAWLESS, Associated Press
LONDON (AP) — The International Monetary Fund has urged the British government to “reassess” a package of unfunded tax cuts it says could fuel inflation and increase economic inequality.
The value of the pound fell Wednesday morning after the IMF’s rare warning of a Group of Seven economy, trading below $1.07.
Treasury chief Kwasi Kwarteng was meeting investment bank executives on Wednesday as the new Conservative government seeks to calm markets.
Prime Minister Liz Truss’ government unveiled a 45 billion pound ($48 billion) tax cut package on Friday in a bid to spur economic growth. But the plan was not accompanied by spending cuts, or even an independent estimate of costs, raising fears it could inflate public debt and add to inflation which is already at a peak of 9 .9% in 40 years.
Political cartoons about world leaders
political cartoons
“Given high inflationary pressures in many countries, including the UK, we do not recommend large, untargeted fiscal programs at this stage, as it is important that fiscal policy does not work against the grain of the monetary policy,” the IMF said in a statement. . “Furthermore, the nature of the UK measures will likely increase inequality.”
The pound fell to a record low against the US dollar on Monday, at $1.0373, amid investor concerns over government policies, which also include borrowing billions to help protect homes and businesses. businesses from soaring energy prices.
The Bank of England has sought to stabilize markets, saying on Monday it was ready to raise interest rates “as much as necessary” to contain inflation. But the bank’s next scheduled meeting isn’t until November, and the lack of immediate action has done little to support the pound.
The British currency is still down 4% since Friday and the pound has fallen 20% against the dollar over the past year.
The turmoil is already having real-world effects, with UK mortgage lenders pulling hundreds of offers off the market as the Bank of England is expected to hike interest rates sharply to offset the inflationary impact of the recent fall in the pound.
The UK government has announced that it will present a more detailed budget plan and independent analysis from the Office for Budget Responsibility on November 23.
“The November 23 budget will provide a first opportunity for the UK government to consider ways to provide more targeted support and to reassess tax measures, particularly those that benefit high-income earners,” the IMF said.
In response, the UK Treasury said the government was “focused on growing the economy to raise living standards for all”.
The November statement will provide further details on the government’s plan and ensure debt declines as a share of gross domestic product “over the medium term”, a spokeswoman said.
Susannah Streeter, senior investment and market analyst at Hargreaves Lansdown, said the IMF’s scathing criticism also comes at a time when yields on UK gilts – the interest paid on government debt – are “exorbitant”, with the yield 10-year gilts hovering around 4.4%, up more than 340% in one year.
“The IMF decision has added to concerns that the UK is rapidly adopting the characteristics of an emerging market economy and risks abandoning its status as a developed country,” Streeter wrote in an analyst note.
Copyright 2022 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.