IMF upgrades UK growth forecast, warns against tax cuts

21st May 2024 12:24

(Sharecast News) - The International Monetary Fund (IMF) revised its growth forecast for the UK economy on Tuesday, projecting a "soft landing" with a faster-than-expected recovery following last year's mild recession.

In its latest outlook for the UK, the Washington-based fund said it now expected gross domestic product (GDP) to grow by 0.7% in 2024 - an upgrade from its previous estimate of 0.5%.

Growth is expected to strengthen to 1.5% in 2025, as real incomes benefit from slowing inflation and easing financial conditions.

Despite the improved outlook, the IMF stressed the need for urgent structural reforms to enhance living standards, especially ahead of the upcoming general election.

It highlighted concerns about the UK's longer-term economic prospects, citing weak labour productivity and higher-than-expected inactivity levels due to illness.

The IMF's review also addressed recent policy decisions, criticising the UK government's cuts to national insurance contributions, which it described as a mistake given the significant fiscal costs.

It warned that the government faced "difficult choices" on taxes and spending to stabilise public debt, which was projected to continue rising towards 97% of GDP.

In light of the current economic environment, the IMF suggested that the Bank of England could cut interest rates by up to three-quarters of a percent this year to support growth, recommending careful consideration of the timing and pace of the cuts to balance the risks of premature and delayed easing.

It also noted improvements in inflation, which cooled to 3.2% in March - its lowest level since September 2021.

The IMF said it expected inflation to approach the Bank of England's 2% target in the coming months, before stabilising further by early 2025.

It also highlighted the need for new revenue sources as the transition to electric vehicles reduces fuel duty income.

The fund suggested implementing road usage charges and other taxes such as VAT, inheritance, and property taxes.

It also recommended ending the triple lock on state pensions, linking increases solely to inflation to manage future fiscal pressures.

Reporting by Josh White for Sharecast.com.