The IMF is applauding a Budget of economic stagnation
Perhaps there should be more sympathy for forecasters. No one is claiming to have a crystal ball. Predictions are snapshots of a moment in time, put together with all the information at hand. As that information changes – and it often does – forecasts shift with it.
After all, we’re less than a week out from the US election, and it still seems impossible to say definitively who will be the next president of the United States. So how can any one forecaster really be held to knowing what the prosperity or economic health of a country will be five years down the line? These are educated guesses. They are far from fact.
So having established sympathies, it’s even easier to issue a critique of the International Monetary Fund’s (IMF) decision to row in behind Labour’s first Budget.
In a rare intervention, the financial arm of the the United Nations praised Rachel Reeves and the Government for their “envisaged reduction in the deficit over the medium term, including by sustainably raising revenue”.
It added that the Budget pivoted to a “focus on boosting growth through a needed increase in public investment while addressing urgent pressures on public services”.
It’s worth mentioning that the IMF doesn’t have the strongest track record when it comes to assessing the UK economy. It predicted economic catastrophe in the wake of Brexit – a narrative which had to be watered down by the forecaster when growth projections were revised upwards in 2017.
Similarly, doom-and-gloom predictions were made after the lockdown years. At the start of 2023, the IMF forecast the UK to be the ugliest baby among advanced economies – a title that eventually fell to Germany instead. This time last year, it expected a growth rate of 0.6pc in 2024 – a figure that was boosted substantially in the IMF’s latest World Economic Outlook report, to 1.1pc.
But as already established, these revisions are bound to take place. Forecasts are always changing. What is so strange about the IMF’s latest intervention is that its proclamations directly contradict what both the assessment of the Budget, and now the markets, are telling us about the policy changes: that this is not a growth-boosting Budget, but rather a continuation of economic stagnation.
Despite what the IMF says about “boosting growth” through increasing public investment, the Office for Budget Responsibility tells a different story: after rigorous assessment of the Government’s borrowing and investment plans, it has actually downgraded its growth forecasts for the latter half of this parliament, ending 2029 with an underwhelming 1.6pc growth.
This hugely disappointing forecast would be more easily countered if markets were rallying and other independent bodies were falling in to praise the Budget. But as it happens, the IMF looks like an outlier.
The surge in UK borrowing costs since the OBR released its assessment suggests markets are not, like the IMF, so convinced that the Chancellor’s announcements will put the UK on a “sustainable” spending path or boost growth.
That gilt yields reached their highest level in a year this week strongly indicates that something has gone wrong. Rather than having a soothing effect on markets, there is growing uncertainty on the part of investors that the UK will ever get its heavy spending problems under control.
This has not been helped by the further black holes spotted in the Budget.
Despite a huge spending boost for public services – applauded by the IMF – the Institute for Fiscal Studies estimates that there is still a £9bn gap in the Budget, if public spending levels are to be sustained. It’s no wonder that markets are not responding with confidence. Either tax or borrowing is likely to increase in the coming years.
When the IMF offered up a previous intervention after Liz Truss’s mini-Budget, it was certainly not alone in its broad criticism of the measures. But it was also a very specific critique of the chaos that was unfolding.
The problem, the IMF said, was that Truss and her government needed to “re-evaluate the tax measures” in their fiscal event, “especially those that benefit high-income earners”. This was the emphasis, rather than on the £100bn Truss was asking markets to lend to fund energy price controls.
It’s no real surprise that the IMF is far more generous to Labour’s Budget. Taxes are going up significantly – not just on assets but on workers and consumers, who the OBR says will bear the brunt of the employer National Insurance tax rises.
Yet still markets are nervous. It is by no means a mini-Budget scenario yet, but their jitters are a very expensive problem for the UK: the more borrowing costs go up, the more the UK will have to pay for those so-called investments and growth plans.
It seems the borrow-and-spend agenda comes under market scrutiny nowadays regardless of which party is in charge. With net debt hovering near 100pc of GDP, any good faith that governments will really balance the books is gone – and made worse when their plans show a ramping up of borrowing plans, to the tune of an additional £140bn over this Parliament.
The real test of the IMF’s backing of Labour’s Budget will be its own next round of growth forecasts. Of course, no one expects perfection. But don’t be surprised if the words don’t match the numbers.
Kate Andrews is Economics Editor at The Spectator