The International Monetary Fund (IMF) said it is closely watching economic developments in the United Kingdom (UK) as the pound continues to depreciate, warning that Prime Minister Liz Truss’s “mini-budget” released on Friday will widen income inequality.
A spokesperson for the organisation remarked that while the package is designed to address rising living costs and energy prices, it will instead “increase inequality.” To this end, he recommended that the British government reconsider measures that “benefit high-income earners.”
The issue was also brought up by the opposition Labour Party’s shadow chancellor of the exchequer, Rachel Reeves, who said that the tax cuts “reward the already wealthy.” She also criticised the plan for relying on increasing government borrowing instead of introducing windfall taxes on oil and gas firms. Reeves said the Truss administration’s announcement was yet another example of the government turning to widely “discredited” ‘trickle-down’ economics.
Here’s the full, critical IMF statement released tonight about the UK. “We do not recommend” big fiscal moves. Nov23 Budget a chance to “reevaluate” (ie change) the big tax cuts just announced. Yikes. pic.twitter.com/w2UF4UvY7W
— Ben Riley-Smith (@benrileysmith) September 27, 2022
She also criticised the government’s refusal to follow the usual practice of releasing independent forecasts of its financial policies.
Chancellor of Exchequer Kwasi Kwarteng responded by saying that because it was not technically a budget announcement, he would present the forecast “in due course.”
Labour Party leader Keir Starmer called on citizens to “punish” Truss for the policy during elections. He declared that the government has “lost control of the British economy.” Addressing a party conference, Starmer underscored: “The government has crashed the pound … they did all this not for you, not for working people, but for tax cuts for the richest one per cent in society.”
Today's measures undo much of the big, progressive tax rises introduced by Johnson and Sunak.
— Institute for Fiscal Studies (@TheIFS) September 23, 2022
The result is that the richest 10% of households gain the most – now only those earning over £155,000 a year will pay less tax overall.@xiaoweixu_ #minibudget pic.twitter.com/iAKyVIK8NB
Last Friday, newly-appointed British finance minister Kwasi Kwarteng announced a new fiscal package that introduced $46 billion in tax cuts, the largest in 50 years. He said that the economic plan would “turn the vicious cycle of stagnation into a virtuous cycle of growth.”
The plan abolishes the top rate of income tax on the highest earning bracket of the society and also removes caps on bankers’ bonuses, slashes the stamp duty tax (which mainly impacted property buyers), and withdrew the increase in National Insurance.
Kwarteng declared that the economic policy formed part of Prime Minister Liz Truss’s promise of a “tax-cutting government.” He said, “For too long in this country, we have indulged in a fight over redistribution. Now, we need to focus on growth, not just how we tax and spend.”
According to the Institute of Fiscal Studies, the reversal of the tax hikes introduced by former Chancellor Rishi Sunak would benefit the richest 10%.
We have to act in the short-term to support households and businesses through the energy shock - just as we did during the pandemic.
— Kwasi Kwarteng (@KwasiKwarteng) September 25, 2022
The UK has the second lowest ratio of public debt to GDP in the G7. We are committed to getting debt to GDP down over the medium-term. pic.twitter.com/ihUz01Uc1O
Making its first comments on the “mini budget” on Tuesday, the IMF said that such “large and untargeted fiscal packages” are unwise at a time when the country faces “elevated inflation pressures.” The international organisation instead recommended targeted support for families and businesses.
Following the announcement, the British pound sterling plummeted to $1.04, the lowest level since 1971. The pound surged slightly to $1.07 on Tuesday, but this was still 7% lower than the exchange rate before Friday. In fact, over the course of the year, the pound has dropped over 20% against the dollar.
The market’s reaction is considered to be a direct result of the government’s failure to provide specific details on how the plan will be executed, particularly the areas of spending that will be cut to reduce government borrowing.
Our Growth Plan delivers vital reforms to:
— UK Prime Minister (@10DowningStreet) September 28, 2022
✅ Get Britain building
✅ Attract investment
✅ Grow the economy
Read more: https://t.co/ZYG1XdToVO pic.twitter.com/EvGKSOh1AN
Furthermore, British mortgage lenders are withdrawing offers from the market, as they expect the Bank of England to raise interest rates to compensate for the pound’s sudden fall.
The plan has also been criticised over its failure to detail how increasing government borrowing by introducing tax cuts will advance the UK’s long-term economic goals, particularly to bring down inflation.
In fact, the government is planning to borrow millions to help families and businesses deal with rising energy prices, which has further fuelled concerns about fuel inflation.
Responding to the concerns on Monday, Truss and Kwarteng clarified that they would not comment on “movements around the market.”
However, in an emergency statement on Monday, Kwarteng reassured that the UK government would introduce “medium term debt-cutting” policies and fresh supply-side reforms by 23 November.