IMF rebukes UK tax cut plans

As Bank of England rolls out government bond buying programme in an effort to calm markets

UK Chancellor of the Exchequer Kwasi Kwarteng

The International Monetary Fund (IMF) has criticised the UK government’s fiscal policy in the wake of chancellor Kwasi Kwarteng’s mini-budget on Friday.

At the so-called “fiscal event”, the chancellor laid out plans for the largest tax cuts in a single statement since 1972, mostly funded through government borrowing. However, the IMF has warned against the measures due to the current inflationary environment.

It said: “We are closely monitoring recent economic developments in the UK and are engaged with the authorities. We understand that the sizable fiscal package announced aims at helping families and businesses deal with the energy shock and at boosting growth via tax cuts and supply measures.

“However, given elevated inflation pressures in many countries, including the UK, we do not recommend large and untargeted fiscal packages at this juncture, as it is important that fiscal policy does not work at cross purposes to monetary policy. Furthermore, the nature of the UK measures will likely increase inequality.”

The IMF also urged the chancellor to re-evaluate the cut to the top rate of tax at the next budget on 23 November.

Since Friday’s mini-budget, the pound has fallen to a record low against the dollar, with more hawkish interest rate rises now expected from the Bank of England.

See also: Mini budget sets off a mini-quake in gilt markets

In response to the IMF statement, a Treasury spokesperson said: “We have acted at speed to protect households and businesses through this winter and the next, following the unprecedented energy price rise caused by Putin’s illegal actions in Ukraine. Our energy price guarantee saves households £1,000 on average and we’re halving business energy bills through the energy bill relief scheme.

“We are focused on growing the economy to raise living standards for everyone and the chancellor has announced he will publish his medium-term fiscal plan on 23 November which will set out further details on the government’s fiscal rules, including ensuring that debt falls as a share of GDP in the medium term.”

BoE rolls up its sleeves

The instability and plunging value of the pound pushed the Bank of England to take steps today to “restore orderly market conditions” by unveiling a “temporary purchase of long-dated UK government bonds”.

“Were dysfunction in this market to continue or worsen, there would be a material risk to UK financial stability. This would lead to an unwarranted tightening of financing conditions and a reduction of the flow of credit to the real economy,” the bank said.

“The purchases will be carried out on whatever scale is necessary to effect this outcome. The operation will be fully indemnified by HM Treasury.”

It added: “These purchases will be strictly time limited. They are intended to tackle a specific problem in the long-dated government bond market. Auctions will take place from today until 14 October. The purchases will be unwound in a smooth and orderly fashion once risks to market functioning are judged to have subsided.”

The intervention “should provide some reassurance to the market”, said Stuart Clark, portfolio manager at Quilter. “However, the BoE is trying to slow down all the plates spinning in the air without letting any fall and the Treasury during the ‘mini-budget’ on Friday threw a bunch of marbles onto the floor to make it more challenging.

“By instigating targeted, controlled and (apparently) time limited intervention the BoE will try to support the economy in order to avoid a more expensive bailout if conditions continue to materially deteriorate while maintaining independence. Above all we need to see the government regain credibility with domestic and international investors and explain how they plan to pay for these tax cuts other than just through borrowing.”

The monetary policy committee’s annual target of an £80bn stock reduction is “unaffected and unchanged”.

The BoE added: “In light of current market conditions, the bank’s executive has postponed the beginning of gilt sale operations that were due to commence next week. The first gilt sale operations will take place on 31 October and proceed thereafter.”

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