Rachel Reeves could have to increase taxes again to balance the books despite a marginally improved economic outlook, the IMF warned today.
The Chancellor has welcomed the international body’s latest assessment nudging up the growth forecast for UK plc from 1.1 per cent to 1.2 per cent this year.
However, it cautioned that there are still serious risks to Britain’s prospects and government must ‘stay the course’ of stabilising the finances.
The report was released amid bitter squabbling over departmental spending settlements due to be announced next month.
Problems have been fuelled after a Labour revolt forced Keir Starmer to commit to partly reversing the scrapping of the winter fuel allowance.
The government has also been dropping strong hints about easing the two-child benefits cap, while MPs are fighting to block other mooted curbs to the welfare budget.
A leaked memo revealed last week that Angela Rayner put forward an array of tax hikes to pensions and companies as an alternative to benefits cuts.
Rachel Reeves could have to increase taxes again to balance the books despite a marginally improved economic outlook, the IMF warned today
The IMF kept the forecast for next year unchanged at 1.4 per cent, and said the prospects were ‘fragile’.
The report suggested there could be scope for ‘refinements’ the fiscal rules.
But the assessment added: ‘It will be important to stay the course and reduce fiscal deficits as planned over the medium term.
‘There are significant risks to the successful implementation of the fiscal strategy, from the high level of global uncertainty, volatile financial market conditions, and the challenge of containing day-to-day spending.
‘Materialization of these risks could result in market pressures, put debt on an upward path, and make it harder to meet the fiscal rules, given limited headroom.
‘To this end, staff recommends adhering to the current plans, and implementing additional revenue or expenditure measures as needed if shocks arise, to maintain compliance with the rules.’
Ms Reeves 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.’
The intervention comes as fears mount about ‘inevitable’ tax hikes in the Autumn.
Closely-watched PMI figures have showed the UK economy losing momentum in recent months
Ms Reeves left herself a thin £9.9billion margin to hit her fiscal rules in the Spring Statement, but experts say that has already been wiped out.
She has insisted she will not repeat the huge tax raid from the Autumn Budget, when she sent the burden to a new record high.
However, there is scepticism about whether further spending cuts will be politically sustainable in the face of Labour resistance. Critics insisted at the time that the plans were not plausible.
Stephen Millard, acting director of the National Institute of Economic and Social Research (NIESR), suggested Ms Reeves could need to bring in between £10billion and £30billion.
He told the Telegraph that scale of revenue could only come from increases to broad taxes such as income tax, national insurance or VAT.
‘It is pretty much inevitable now that she will have to raise one of those big taxes,’ he said.
Shadow chancellor Mel Stride said: ‘Rachel Reeves, our tin foil Chancellor, has folded at every turn – rewriting fscal rules and then constantly teetering on the edge of breaking them, while at the same time fuelling speculation over welfare U-turns.’
Pressure on Labour has been intensified by Nigel Farage moving to woo left-wing voters, promising a full reversal of winter fuel allowance cuts and to ditch the two-child cap on benefits.
A leaked memo revealed last week that Angela Rayner put forward an array of tax hikes to pensions and companies as an alternative to benefits cuts
