International Monetary Fund Intensifies Criticism Against Kwasi Kwarteng’s Mini Budget

The body, which works to stabilise economic growth, admitted tax cuts announced by Kwasi Kwarteng would boost growth in the short-term.

But it said the cuts would “complicate the fight” against soaring prices.

It anticipates high prices to last longer in the UK with only Slovakia out of the eurozone set to see higher inflation.

Inflation is expected to peak at about 11.3% before the end of the year in the UK, according to the IMF’s latest assessment of the global economy.

The IMf  expects price rises will average at about 9% – far above the Bank of England’s target of 2%.

Although the UK economy is set to grow the fastest of the major economies included in the G7 group this year, it is projected to grind to a near-halt next year, with it expanding by just 0.3%.

The most recent figures included in the report by the influential financial institution do not fully, however, take into account the UK chancellor’s recent mini-budget.

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.

“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 for a third time in two weeks on Tuesday, as market jitters resurfaced.

After Mr Kwarteng unveiled plans for huge tax cuts in the UK, the IMF criticised the plans warning they were likely to increase inequality and add to pressures pushing up prices.

It was an unusually outspoken statement from the IMF, which has a key role in acting as an early economic warning system.

The IMF said it understood the government’s mini-budget aimed to boost growth, but it said that the tax cuts could speed up the pace of price rises, which the UK’s central bank, the Bank of England, is trying to bring down.

Downing Street defended the chancellor’s plans, with the Prime Minister’s official spokesperson saying its policies aimed “to support British people at a time of global high prices” and said the IMF report showed “the global challenges that countries are facing”.

It also warned that the global economy was facing a downturn with “the worst yet to come” as war in Ukraine helps push prices higher around he globe.

“For many people 2023 will feel like a recession,” it warned.

It said governments and central banks globally had to work together to help people through the turmoil.

The IMF’s Pierre-Olivier Gourinchas told the BBC: “Imagine a car with two drivers at the front and each of them has a steering wheel – and one wants to go left and the other wants to go right.”

He added: “One is the central bank trying to cool off the economy so that price pressures will ease, and the other one wants to spend more to support families… it’s probably not going to work very well.”

In the UK, the chancellor has already said he will bring forward his economic plan where he will spell out how he plans to pay for the tax cuts and provide an independent forecast on the UK economy’s prospects, a move welcomed by the IMF.