UK faces ‘difficult choices’ to fix economy, warns IMF

WASHINGTON/LONDON: Britain, whose new Labour government has just taken office, is facing difficult choices due to its high level of public debt, the International Monetary Fund warned on Monday.

LONDON: Britain's Chancellor of the Exchequer Rachel Reeves (center left) chairs a meeting of the National Wealth Fund Taskforce at 11 Downing Street in London on July 9, 2024. -- AFP.

According to the Washington-based institution, “the main medium-term challenge for fiscal policy will be to better account for public spending needs, while assuredly stabilizing public debt.” The warning was part of the IMF’s annual review of the country’s economic and financial situation, known as the Article IV consultation. “Absent a substantial boost to potential growth, stabilizing public debt will require difficult tax and spending choices,” the IMF said.

The Fund said there was a need for major investment, particularly in the healthcare sector, against a backdrop of chronic underfunding and an aging population, as well as “more ambitious structural reforms to boost potential growth.” But the IMF also stressed the need to keep public debt under control, as it approached the equivalent of 100 percent of the country’s GDP.

Among the measures that could be taken to meet this dual challenge, the IMF pointed to the possibility of boosting government tax revenues through increases in a carbon tax, inheritance tax, property tax and a broadening of the VAT base. Though it predicted a “soft landing” after a short recession late last year, the Fund expressed caution about long-term growth, expecting it to be moderate, due to weak productivity growth, an ageing population and high levels of inactivity.

On the other hand, the IMF said increased immigration has so far helped to offset these negative effects, despite the persistent drag of post-Brexit effects, which are nevertheless gradually fading over time. The IMF confirmed that inflation is back on target, anticipating a slight rise to 2.5 percent by the end of the year, though this will only be temporary. Following near-zero growth in 2023, the UK economy is expected to grow by 0.7 percent this year, before accelerating to 1.5 percent in 2025 and 1.7 percent in 2026. On Friday, the UK opened a new chapter in its history following the landslide victory in the general election of the Labour Party led by Keir Starmer, marking the end of 14 years of Conservative government.

New Finance Minister Rachel Reeves, the first woman to hold the post, said on Monday that it was necessary to stimulate economic growth, in particular by speeding up infrastructure construction, especially in onshore wind power and housing.

Meanwhile, Britain’s new government took a first step on Tuesday to boost public and private investment to modernize the economy, placing a National Wealth Fund to sit atop the existing state-owned British Business Bank and UK Infrastructure Bank.

Prime Minister Keir Starmer and his Finance Minister Rachel Reeves hope to attract investment in new and growing industries as part of their push to speed up Britain’s economy and meet the challenge of net zero.

“Britain is open for business - and the work of change has begun,” Reeves said as she unveiled the new structure of the state entities charged with increasing investment. Starmer has rejected Labour’s long-held image as a “tax and spend” party and has pledged to channel more private investment to fix problems in Britain’s economy. Business investment in the country has been weak since the 2016 Brexit vote which triggered years of political instability and much of the country lags behind London in terms of productivity.

Labour plans to allocate an additional 7.3 billion pounds ($9.35 billion) of public money via the existing UK Infrastructure Bank so investments can be launched immediately. The government hopes to attract three times as much from private capital to invest in areas such as ports, hydrogen, automotives and steel. Officials say the new fund will serve as a sovereign-backed green catalytic fund and will not resemble sovereign wealth funds operated by resource-rich countries such as Norway and Saudi Arabia. The government will bring forward new legislation to cement the fund in statute, making it a permanent institution, the finance ministry said. – Agencies.