The IMF has openly criticized the costly economic support plan announced Friday by the United Kingdom, going so far as to ask London to reassess its measures.
The British Treasury on Wednesday defended its budget plan announced last week, which combines massive support for energy bills and all-out tax cuts, despite abrupt and unusual criticism from the IMF, Moody’s and those of the political class. “We acted quickly to protect households and businesses this winter and next winter, after unprecedented energy price hikes causedby the war in Ukraine, justified the Treasury in a press release.
“We are focused on growing the economy and the standard of living for all and ChancellorExchequer Kwasi Kwarteng, who is due to meet with banking officials on Wednesday,will publish a medium-term budget plan on 23 November” who “ensure that debt declines in its share of GDP“, he adds. In an unusually critical statement, the International Monetary Fund (IMF) said it “watched carefullythe situation in the United Kingdom, and calls on London to rectify the situation.
Read alsoUnited Kingdom: the Labor opposition launches an assault on a weakened Liz Truss
“Given the high inflationary pressures in several countries, including the UK, we do not recommend significant unfunded fiscal measures, as it is important that fiscal policy does not stand in the way of monetary policyadmonishes the IMF. “The November 23 budget presents an opportunity for the British government to (…) reassess its tax measures, particularly those targeting the highest incomes“, who risk”increase inequalities“, adds the IMF in its press release in the form of a snub for the new Prime Minister Liz Truss and for Kwasi Kwarteng.
Unsustainable debt
Rating agency Moody’s is no exception, stating in a note that “vast unfunded tax cuts“by cuts in public spending elsewhere”will lead to higher structural deficits, which are unlikely to solve long-term growth problemsand could lead to an unsustainable debt. Asked about the subject, US Finance Minister Janet Yellen said that the US Treasury was also closely monitoring the economic situation in London.
Kwasi Kwarteng’s budget announcements on Friday had caused the pound to plunge to an all-time low. On Wednesday, the currency was down slightly from 0.37% to 1.0692 dollars around 09:00 GMT after rising a little the day before. The planned expenditure, of which only part of the cost – aid for energy bills for six months – has been quantified by London, is estimated at between 100 and 200 billion pounds by economists. The latter are also worried about the lack of rebalancing of the public accounts by planning tax cuts in parallel with the budgetary stimuli. Finally, the impact on the UK economy has not been calculated either, although Kwasi Kwarteng has promised official forecasts by the end of the year.
Investors’ concerns were also palpable in the bond market where the yield on 10-year bonds was tightening, reaching a new high since the end of 2008 at 4.59% at the start of trading on Wednesday, and the bond yield at 30 years soared to 5.14%, a high since 1998.
The Bank of England chose to wait until its meeting in early November to act, disappointing markets which had hoped for an emergency meeting after the pound plunged. However, she indicated that the budget package “consequentof the Conservative government of Liz Truss would require an interest rate hike just as “consequent“. Britain’s opposition Labor economic leader Rachel Reeves called on Downing Street to “explain urgently how the government intends to solve the problems it has created by its reckless decisions“. “Waiting for November is not an option“, she insisted.
SEE ALSO – IMF warns of ‘risks’ threatening economy, including war in Ukraine and inflation