The International Monetary Fund (IMF) has upgraded its forecasts for the UK’s growth this year but warned that the government will face “tough choices” to stabilise national debt.
“With growth recovering faster than expected, the UK economy is approaching a soft landing, following a mild technical recession in 2023,” the Washington based body said in its latest assessment of the UK economy.
It now expects the UK to grow 0.7 per cent in 2024, an upgrade on its April estimate of 0.5 per cent. Growth will then pick up to 1.5 per cent next year as “disinflation buoys real incomes and financial conditions ease”.
The new forecasts come after the economy grew 0.6 per cent in the first quarter of the year, faster than predicted by many economists and independent forecasters.
However, the IMF noted that the UK faces a number of structural challenges which will limit potential growth in the longer term, including an ageing population and slow productivity growth.
It urged the government to take major structural reforms to boost the potential rate of growth. “Ambitious, structural reforms to boost economic potential and living standards are urgently needed, with a focus on easing planning restrictions, addressing skills shortages and improving health outcomes,” it said.
These structural reforms should be backed by an independent growth commission, the IMF said.
Without undertaking major structural reforms, the IMF warned that the UK’s fiscal position will “likely involve some tough choices”.
It highlighted that the government’s post-election spending plans, which assume one per cent growth in real terms and frozen capital spending, “do not appear to sufficiently account for known pressures in public services”.
“Difficult choices will need to be made over the medium term to stabilise public debt, given significant pressures on public services and critical investment needs”
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Among the measures recommended by the IMF were higher carbon taxes, broadening the inheritance tax base and reforms to capital gains tax. Public service productivity could also be improved through the use of AI.
However, it advised against tax cuts. “As a general principle, staff would advise against additional tax cuts, unless they are credibly growth-enhancing and appropriately offset by high-quality deficit-reducing measures,” the IMF said.
Jeremy Hunt’s cuts to National Insurance came in for criticism given their “significant cost”, but the IMF did acknowledge the “potential labour supply benefits” and noted that the costs were partially offset by other measures, such as reforms to the non-dom regime.
On monetary policy, the IMF warned that the Bank of England could “stall or even reverse the recovery” by keeping rates on hold for too long. It recommended interest rates cut of about 50-75 basis points, noting that its meeting-by-meeting approach to policy was broadly “appropriate”.
Chancellor Jeremy Hunt said: “Today’s report clearly shows that independent international economists agree that the UK economy has turned a corner and is on course for a soft landing.
“The IMF have upgraded our growth for this year and forecast we will grow faster than any other large European country over the next six years – so it is time to shake off some of the unjustified pessimism about our prospects,” he continued.