IMF warns Hunt against tax cuts; eurozone avoids recession – business live

The IMF have confirmed that are advising the UK not to lower taxes further.

They’re holding a press conference now on their latest World Economic Outlook, released 40 minute ago, where chief economist Pierre-Olivier Gourinchas has been quizzed about their advice to the UK.

Gourinchas explains that the IMF expects the UK to grow by 0.6% this year, rising to 1.6% in 2025 – which would be a return to “some level of normalcy”.

And the IMF’s message to the UK, and a number of other countries, is that they need to put in place medium-term fiscal plans that will accommodate a “very significant increase in spending pressures.”

In the case of the UK, Gourinchas says, that could include spending on health care and modernising the NHS, spending on social care, and on education.

There is also the need for critical public investment to address climate issues, and also to boost growth.

This means it is “very important” to have medium term fiscal plans in place that accommodate this pressures, and ensure that debt dynamics remain remain “stable and contained”, Gourinchas explains.

That requires a combination of tax and spending measures, so the government can allocate resources where they are needed while preventing your debt levels from increasing.

Gourinchas adds:

“In that context we would advise against further discretionary tax cuts as envisioned and discussed now.”

Over in the US, consumer confidence has risen to a two-year high as the slowdown in inflation cheers households.

The Conference Board’s Consumer Confidence Indexrose in January to 114.8, up from 108.0 in December. The reading was the highest since December 2021, and marked the third straight monthly increase.

Dana Peterson, chief economist at The Conference Board, says:

“January’s increase in consumer confidence likely reflected slower inflation, anticipation of lower interest rates ahead, and generally favorable employment conditions as companies continue to hoard labor.”

The IMF has also given a thumbs-down to the free market policies of Argentina’s new president, Javier Milei.

The Fund has cut its growth estimate for Argentina, forecasting South America’s second-largest economy will shrink by 2.8% this year, following a 1.1% contraction in 2023.

Back in October, the Fund forecast 2.8% growth in 2024.

Milei is making wide-ranging reforms to Argentina, deregulating the economy and removing regulations covering housing rental market, export customs arrangements, land ownership, and food retailers. He is also pushing through a wave of privatisations, ferocious spending cuts, a major expansion of presidential powers, and a scaling back of workers’ rights and the right to protest, and proposing tax amnesties.

But unions are resisting, holding nationwide strike action.

The IMF’s intervention comes less than two weeks after Jeremy Hunt hinted that he could deliver big tax cuts in his March budget.

Speaking at the World Economic Forum in Davos in mid-January, Hunt told UK journalists that he wanted to take the UK in the direction of the faster-growing economies in North America and Asia which tend to have lower taxes.

A week later, the latest public finances showed a drop in borrowing in December, giving Hunt up to £20bn of fiscal headroom to lower taxes.

The IMF, though, wants him to use that wriggle-room to keep the national debt in check, while also preserving public services and making critical investments.

Some early reaction to the IMF’s position:

The last time the IMF intervened in UK government policy was September 2022, when it openly criticized then-Prime Minister Liz Truss’s disastrous mini-budget, points out Bloomberg.

That mini-budget, which contained unfunded tax cuts and lacked independent assessment from the Office for Budget Responsibility, caused turmoil on financial markets and knocked the pound to a record low.

Relations have improved under Rishi Sunak, who reversed most of the unfunded tax cuts proposed by Truss, but the fund’s latest stance places it at odds with the government’s clear ambition, Bloomberg adds.

The IMF have confirmed that are advising the UK not to lower taxes further.

They’re holding a press conference now on their latest World Economic Outlook, released 40 minute ago, where chief economist Pierre-Olivier Gourinchas has been quizzed about their advice to the UK.

Gourinchas explains that the IMF expects the UK to grow by 0.6% this year, rising to 1.6% in 2025 – which would be a return to “some level of normalcy”.

And the IMF’s message to the UK, and a number of other countries, is that they need to put in place medium-term fiscal plans that will accommodate a “very significant increase in spending pressures.”

In the case of the UK, Gourinchas says, that could include spending on health care and modernising the NHS, spending on social care, and on education.

There is also the need for critical public investment to address climate issues, and also to boost growth.

This means it is “very important” to have medium term fiscal plans in place that accommodate this pressures, and ensure that debt dynamics remain remain “stable and contained”, Gourinchas explains.

That requires a combination of tax and spending measures, so the government can allocate resources where they are needed while preventing your debt levels from increasing.

Gourinchas adds:

“In that context we would advise against further discretionary tax cuts as envisioned and discussed now.”

Chancellor Jeremy Hunt has responded to the IMF’s warning, saying it’s “too early” to know if he’ll be able to cut taxes in the budget:

“The IMF expect growth to strengthen over the next few years, supported by our introduction of the biggest capital investment tax reliefs anywhere in the world, alongside National Insurance cuts to improve work incentives.

It is too early to know whether further reductions in tax will be affordable in the Budget, but we continue to believe that smart tax reductions can make a big difference in boosting growth.”

The timing of the IMF’s warning against UK tax cuts is “incredibly inconvenient” for chancellor Jeremy Hunt, says ITV’s Joel Hills.

He writes:

The IMF suggests there’s a strong case for putting taxes up, given that, it believes the pressures on the public finances in Britain will only increase in the years ahead.

An IMF spokesperson said:

“Preserving high-quality public services and undertaking critical public investments to boost growth and achieve the net zero targets, will imply higher spending needs over the medium term than are currently reflected in the government’s budget plans.

Accommodating these needs, while assuredly stabilising the debt/GDP ratio, will already require generating additional high-quality fiscal savings, including on the tax side.”

The global economy is gliding towards a “soft landing” after coping with the impact of tough central bank interest-rate action to reduce inflation, the International Monetary Fund has said.

Revising up its growth estimates for 2024, the IMF said a number of major economies – including the US, China, Russia and India – had posted stronger than expected performances in 2023 and it was surprised by the resilience shown.

Pierre-Olivier Gourinchas, the IMF’s economic counsellor said:

“The clouds are beginning to part. The global economy begins the final descent toward a soft landing, with inflation declining steadily and growth holding up.”

Announcing details of the interim World Economic Outlook (WEO), Gourinchas said the IMF expected global growth to be 3.1% in both 2023 and 2024, upward revisions of 0.1 and 0.2 percentage points respectively. But he stressed the pace of expansion – which compares with an average of 3.8% during the 2010s – remained slow and there was a risk of turbulence ahead.

More here.

The IMF has warned UK chancellor Jeremy Hunt against cutting taxes, an intervention that is unlikely to be welcomed by the government ahead of the budget in early March.

Instead of tax giveaways, the IMF argues the UK needs to curb public borrowing, rebuild its fiscal buffers, and prioritise spending in areas such as health, education and tackling climate change.

Pierre-Olivier Gourinchas, IMF chief economist, told the Financial Times the UK’s focus should be on “the path towards a fiscal consolidation” despite expectations that Hunt will cut taxes at his spring Budget.

Gourinchas says:

“We would rather wish they would not do this type of tax cuts, and that they would instead focus on both addressing the spending needs and on the path towards a fiscal consolidation.”

More here.