Kwasi Kwarteng’s tax cuts likely to increase inequality, IMF says

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Kwasi Kwarteng’s tax-cutting mini-budget is likely to increase inequality and should be more targeted at households that are worst affected by the energy crisis and rising inflation, the International Monetary Fund has said.

In a stinging rebuke to the chancellor’s aim of rebooting economic growth, a spokesperson for the IMF said the UK should avoid handing out cash in tax cuts that will force the Bank of England to respond with higher interest rates.

The organisation has consistently warned countries to avoid universal bailouts in response to the energy price shock. It has argued that only the poorest households should be protected from higher energy bills and the extra costs from rising inflation to limit the impact on public borrowing.

“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,” the spokesperson said in the IMF’s first public reaction.

The former US Treasury secretary Larry Summers said earlier on Tuesday that he was surprised the IMF had not intervened since the mini-budget on Friday.

The IMF spokesperson said, in response to a query from Reuters: “We are closely monitoring recent economic developments in the UK and are engaged with the authorities.”

Kwarteng cut the top rate of tax from 45p to 40p and promised a 1p cut in the basic rate of tax from April next year. He also said he would retain corporation tax at 19% – scrapping a planned rise to 25% – and reverse a recent rise in national insurance payments, saying that the near ?50bn cost would be added to the UK’s debt pile.

The move sent sterling and government bonds into freefall over the weekend and on Monday, despite Kwarteng arguing that the budget was aimed at growing the economy.

Kwarteng calmed markets by saying he would set out medium-term debt-cutting plans on 23 November, alongside forecasts from the independent Office for Budget Responsibility of the full scale of government borrowing.

The Bank of England also issued a notice saying it stood ready to raise interest rates to bring down inflation. However, most analysts forecast that the pound would continue to fall and borrowing costs rise unless the government reversed at least some of its planned tax cuts.

The IMF spokesperson said the Washington-based lender of last resort, which the UK asked for help during a currency crisis in 1976, understood that Britain’s “sizable fiscal package” was intended to help residents deal with higher energy prices and to boost growth via tax cuts and supply measures, but such measures could put fiscal policy at cross purposes with monetary policy.