The UK has a difficult tax decision to make: IMF
The International Monetary Fund (IMF) has concluded its latest visit to the UK, with the group noting that the UK economy is now seeing positive signs of growth, but that the government will face difficult fiscal decisions going forward.
After a slowdown in the second half of 2024, an economic recovery is underway and is expected to gain momentum, the group said. “Economic activity decelerated during 2024 H2, partly reflecting weaker export performance in the challenging global environment. In recent months, high-frequency indicators have shown signs of improvement,” it said.
The IMF now projects growth at 1.2% in 2025 and 1.4% in 2026, as monetary easing, positive wealth effects, and an uptick in confidence bolster private consumption, while the boost to public spending in the October budget will also help support growth.
The forecast assumes that global trade tensions will 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, the group said.
However, risks to growth remain to the downside, it said. “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.”
A difficult decision to be made
The IMF is broadly positive about the Labour government’s current growth strategy, which it says should support growth over the next five years. “The new spending plans are credible and growth-friendly, taking account of pressures on public services and investment needs,” it said.
“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 stabilise net debt.”
However, it cautioned that more difficult decisions will need to be made longer term, including possible tax increases to make up for shortfalls.
“In the longer term, difficult fiscal choices will likely be needed to address spending pressures and rebuild fiscal buffers. Under current policies, staff analysis suggests spending to be around 8% of GDP higher by 2050, mainly due to additional outlays on health and pensions from population ageing,” it said.
“There is limited space to finance this spending through extra borrowing, given high debt and elevated borrowing costs. 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.”
