Rachel Reeves and Sir Keir Starmer (Image: Getty)
Chancellor Rachel Reeves has been warned she must “stay the course” and stick to her fiscal rules as a host of risks threaten the national finances. The International Monetary Fund has upgraded its growth forecast for this year from 1.1% to 1.2% – but it warns of a major threat to the long-term prosperity of the UK.
It states: “Persistently weak productivity remains the UK’s primary obstacle to lifting growth and living standards.”
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Britain suffers from “chronic under-investment” and a “deterioration in health outcomes,” the experts warn. It also suffers from low private sector investment in research and development and “limited access to finance for businesses to scale up, skill gaps, and a deterioration in health outcomes”.
The UK’s GDP is around a quarter lower than what would have been expected before the global financial crisis.
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Although growth is expected to hit 1.4% in 2026 the IMF expects the UK will be hit by “trade tensions” linked to President Trump’s tariff plans threaten to reduce UK economic growth next year.
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“The forecast assumes that global trade tensions lower the level of UK GDP by 0.3% by 2026, due to persistent uncertainty, slower activity in UK trading partners, and the direct impact of remaining US tariffs on the UK,” it states.
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The IMF makes it clear Ms Reeves must stick to her fiscal rules to guard against higher debt costs.
The “stability rule” states the Government should only borrow to invest, with day to day spending matched by tax revenues. The “investment rule” requires the Government to reduce debt as a share of the economy.
“It will be important to stay the course and deliver the planned deficit reduction over the next five years to stabilize net debt and reduce vulnerability to gilt market pressures,” the IMF insists.
It warns of the key threats facing the Chancellor – “the high level of global uncertainty, volatile financial market conditions, and the challenge of containing day-to-day spending”.
The analysts stress these risks could push up debt and “make it harder” for her to keep her fiscal rules.
The IMF also warns that in the longer-term “difficult fiscal choices will likely be needed to address spending pressures”.
Spending on health and the pensions of ageing population is expected to push up spending even higher in the coming decades. The body says “tough” decisions will be needed about the “role of the state”.
“There is limited space to finance this spending through extra borrowing, given high debt and elevated borrowing costs,” the experts warn. “Unless revenue is increased, for which there is scope, tough policy decisions on spending priorities and the role of the state in certain areas will be needed to better align the coverage of public services with available resources.”
The IMF favours a gradual process to lowering interest rates, saying it should “continue to ease monetary policy gradually, while remaining flexible in light of elevated uncertainty”.
A key threat to growth is if worried households decide to save cash instead of spending it. The UK is also vulnerable to the uncertainty swirling through the global economy.
The IMF says: “Tighter-than-expected financial conditions, combined with rising precautionary saving by households, would hinder the rebound in private consumption and slow the recovery. Persistent global trade uncertainty could further weigh on UK growth, by weakening global economic activity, disrupting supply chains, and undermining private investment.”
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The Chancellor will welcome the IMF’s vote of confidence in her overall strategy.
Crucially, the IMF says: “An economic recovery is underway.”
It states: “The authorities’ fiscal strategy for the next five years appropriately supports growth while safeguarding fiscal sustainability. The new spending plans are credible and growth-friendly, taking account of pressures on public services and investment needs.
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“They are expected to provide an economic boost over the medium term that outweighs the impact of higher taxation. As revenue is projected to increase, deficits are set to decline and stabilize net debt.”
The IMF has warm words for her fiscal plans, saying these “strike a good balance between supporting growth and safeguarding fiscal sustainability”. It also supports efforts to support productivity, saying plans focus “on the right areas”.
The Chancellor said: “The UK was the fastest growing economy in the G7 for the first three months of this year and today the IMF has upgraded our growth forecast. We’re getting results for working people through our Plan for Change – with three new trade deals protecting jobs, boosting investment and cutting prices, a pay rise for three million workers through the National Living Wage, and wages beating inflation by ￡1,000 over the past year.”