Chancellor urged to rethink tax plans as IMF issues unprecedented attack saying they will ‘increase inequality’
28 September 2022, 00:08 | Updated: 28 September 2022, 06:08
Kwasi Kwarteng is falling under increasing pressure to change financial course after the International Monetary Fund (IMF) criticised his mini budget.
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In an extraordinary statement, the IMF said it was "closely monitoring" developments and urged the Chancellor to "reevaluate" his plans after a raft of tax cuts and increased borrowing spooked the markets.
It warned the current plans - including the abolition of the 45p rate of income tax for people on more than £150,000 - are likely to increase inequality.
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Shadow chancellor Rachel Reeves said the intervention from the IMF "shows the seriousness of the situation" and urged the Government to "fix the problems it created".
She said waiting until November for the next financial statement was "not an option", and "alarm bells" should be ringing and forcing the government to "act now".
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But the Chancellor insisted he was "confident" his tax-cutting strategy will deliver the promised economic growth.
After a day of turmoil in the markets on Monday which saw sterling slump to a record low against the dollar, the Chancellor sought to reassure City investors he has a "credible plan" to start reducing the UK's debt mountain.
But the IMF said in a statement: "We understand that the sizeable fiscal package announced aims at helping families and businesses deal with the energy shock and at boosting growth via tax cuts and supply measures.
"However, given elevated inflation pressures in many countries, including the UK, we do not recommend large and untargeted fiscal packages at this juncture, as it is important that fiscal policy does not work at cross purposes to monetary policy.
"Furthermore, the nature of the UK measures will likely increase inequality."
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It urged Mr Kwarteng to change course when he comes back to Parliament in November with another package, intended to show how he will get the public finances back on track.
"The November 23 budget will present an early opportunity for the UK Government to consider ways to provide support that is more targeted and reevaluate the tax measures, especially those that benefit high income earners," the IMF said.
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Ms Reeves said: "This statement from the IMF shows the seriousness of the situation.
"Families will be concerned about what market movements in recent days mean for them.
"The Government must urgently lay out how it will fix the problems it created through its reckless decisions to waste money in an untargeted cut in the top rate of tax.
"Waiting until November is not an option. The Government must urgently review the plans made in their fiscal statement last week.
"First the Bank of England had to step in to reassure markets. Now, this statement from the IMF should set alarm bells ringing in government and make it clear that they need to act now."
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The value of the pound plummeted in the aftermath of the statement.
The Bank of England signalled it was ready to ramp up interest rates to shore up the pound and guard against increased inflation.
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In response to the criticism a Treasury spokeswoman said: "We have acted at speed to protect households and businesses through this winter and the next, following the unprecedented energy price rise caused by Putin's illegal actions in Ukraine."
The Government was "focused on growing the economy to raise living standards for everyone" and the Chancellor's statement on November 23 "will set out further details on the government's fiscal rules, including ensuring that debt falls as a share of GDP (gross domestic product) in the medium term", the spokeswoman said.
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The Bank of England's chief economist Huw Pill warned they "cannot be indifferent" to the developments of the past days - seen as a signal the cost of borrowing will have to go up to protect the pound and keep a lid on inflation.
"It is hard not to draw the conclusion that all this will require significant monetary policy response," Mr Pill said in a speech to the Barclays-CEPR International Monetary Policy Forum.
"We must be confident in the stability of the UK's economic framework."
After two days of big changes, the pound settled down on Tuesday, trading at around 1.08 dollars for most of the day, deviating only briefly with a two cent drop.
London's top stock index, the FTSE 100, was also subdued for most of the day.
But European markets dropped heavily just before close as the price of gas spiked.
The FTSE closed the day down 0.5. per cent on Tuesday afternoon and, worryingly for the Government, gilt yields, reflecting the cost of borrowing by the state, rose 1.6 per cent, more than a quarter higher than just a week ago.
But with some analysts predicting the base rate, currently standing at 2.25 per cent, will have to rise to as high as 6 per cent next year, some lenders began withdrawing mortgage products amid the uncertainty.
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The crisis was triggered by Mr Kwarteng's mini-budget on Friday when he unveiled a massive £45 billion tax cut funded by Government borrowing.
At a meeting on Tuesday with institutional investors, the Chancellor emphasised the importance of the "supply side" reforms ministers will be setting out in the coming weeks to boost growth, including his "Big Bang 2.0" reforms to further liberalise financial market regulation.
"We are confident in our long-term strategy to drive economic growth through tax cuts and supply side reform," he told them, according to a Treasury readout of the meeting.
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His comments came amid reports that Liz Truss had initially resisted moves by the Treasury on Monday to announce the new medium-term fiscal plan in order to calm the markets.
Government sources did not deny the Prime Minister and Chancellor had met to discuss the issue but insisted suggestions it had been an "argumentative" encounter and descended into a "shouting match" were wide of the mark.
Despite a calmer day on Tuesday, many Conservative MPs remain deeply concerned about the political fallout from the tumultuous start to Ms Truss's premiership.
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It is understood that Mr Kwarteng held a call with Tory MPs alongside Chief Secretary to the Treasury Chris Philp, as the Chancellor sought to settle nerves among colleagues after the turbulence of recent days.
With a YouGov poll for The Times showing Labour opening up a 17-point lead, some MPs who did not support her in the leadership contest have privately questioned whether she is up to the job.
Mel Stride, the chairman of the Commons Treasury Committee, who backed Rishi Sunak for the leadership, said the party's reputation on the economy was "in jeopardy".
He said the country was in "an extremely difficult situation" with higher borrowing costs than Italy or Greece and that it was essential to rebuild confidence in the wake of the Chancellor's "unfunded" tax promises.
