Kwasi Kwarteng has come under fresh fire from the International Monetary Fund after the Washington-based organisation said his tax cuts and energy support package had made the Bank of England’s battle against inflation more difficult.
The IMF used its prestigious world economic outlook (WEO) to criticise the scale of the stimulus provided by the chancellor and the blanket nature of the price cap on gas and electricity bills.
It said the UK was on course for a sizeable slowdown in growth from 3.6% this year to 0.3% in 2023 but said its forecasts had been made before Kwarteng delivered his mini-budget on 23 September.
“The fiscal package is expected to lift growth somewhat above the forecast in the near term, while complicating the fight against inflation,” the IMF said. Financial markets expect Threadneedle Street to raise interest rates – currently at 2.25% – by at least 0.75 percentage points at its next meeting in early November.
The WEO noted the hostile market reaction to Kwarteng’s September package, which forced the Bank of England to announce emergency measures to halt a run on pension funds.
“In the United Kingdom, the announcement in September of large debt-financed fiscal loosening, including tax cuts and measures to deal with the high energy prices, was associated with a rise in gilt yields and a sharp currency depreciation that was later reversed,” it said.
Gilts yields are the return on the capital invested in buying government bonds. Rising yields mean government bonds are less in demand by investors and the government’s cost of borrowing increases.
Kwarteng will be in Washington for the annual meeting of the IMF later this week and will seek to allay concerns about the government’s growth plan.
The IMF said finance ministries should not be at cross-purposes with central banks as they sought to quell price pressures.
“Without fiscal contraction elsewhere, and with tight supply, unfunded government spending increases or tax cuts will only push inflation up further and make monetary policymakers’ jobs harder,” it said.
The Bank of England was forced to intervene in bond markets for a third time in two weeks on Tuesday, as market jitters resurfaced.
Kwarteng has announced plans to cap annual average household energy bills at £2,500 for the next two winters but the IMF expressed strong misgivings about the package.
It said: “The sizeable energy package announced by the UK government, aimed at assisting all families and businesses dealing with high energy prices, has scope for better targeting the vulnerable, which would lower the cost of the package and better preserve incentives to save energy.”
The WEO represents the second time in two weeks that the IMF has raised concerns about the new government’s approach. Last month an IMF spokesperson said it did not recommend large and unfunded packages when inflation was so high.
On Monday the chancellor announced he was bringing forward the date of his debt cutting plan, which will be published alongside new forecasts from the Office for the Budget Responsibility, to 31 October from 23 November.
