IMF fears tax cuts will widen gap between rich and poorpublished at 09:12 British Summer Time 28 September 2022

09:12 BST 28 September 2022

Dharshini David
Economics Correspondent

This is an exceptionally blunt warning from the IMF, indicating that Chancellor Kwasi Kwarteng's £45bn mini-budget spree may not only have been ill-judged and risks sharper interest rate rises, but could also increase income inequality.

How likely is the latter?

The Truss government's growth plan centres on tax cuts for the better off, in the hope it will benefit wider society by boosting investment, innovation and job creation.

But a 2020 study by academics at the London School of Economics examined the impact of such policies in wealthy countries over five decades - and found they failed to significantly boost growth or jobs. They were more likely, the study claimed, to widen the gap between rich and poor.

At the very start of the Conservative leadership campaign, a top IMF official told me large-scale universal tax cuts in the UK would be a "mistake" .

Instead, as the energy price crisis has intensified, it's been calling for measures that are targeted towards the least well-off. And it's openly urging the government to focus on that when the chancellor reveals the next instalment of his plans in November.

There's little indication so far those calls will be heeded.

Labour will inherit a UK economy that is in a "complete mess" if it comes to power at the next general election, Sir Keir Starmer has said.

But the party is setting out "carefully costed well thought out plans that have the confidence of the markets and everybody else," the Labour leader tells the Today programme.

He says these plans include:

• Reversing the government's decision not to rise corporation tax, as it had previously pledged to do
• Cancelling the axeing of the 45% tax rate for the highest earners
• Introducing a windfall tax on energy companies
• Changing the non-domicile status that currently allows a person who was born in another country but lives in the UK to only pay tax on their income in the country

He reiterates his pledge to set up a publicly-owned company that will "invest and unleash investment in clean energy".

Responding to suggestions he is not charismatic enough, Starmer tells the programme: "Do we need a serious person steering the country calmly and confidently to a better future.... I think the answer to that is yes."

Government will attempt to offer buckets of reassurancepublished at 08:43 British Summer Time 28 September 2022

08:43 BST 28 September 2022

Chris Mason
Political editor

IMF are the three letters of economics and politics associated with failure and calamity.

This is a statement from the organisation, rather than anything else, but adds yet further to the swirl of criticism from powerful and influential voices from trading floors to international institutions suggesting, bluntly, that the new prime minister and her chancellor don't know what they are doing.

Within government, the IMF statement is seen as disproportionate, especially the focus on the removal of the additional rate of income tax paid on earnings over £150,000 a year, given it generates a relatively small amount of money for the Treasury.

Today, the chancellor will meet banks and Conservative MPs and attempt to offer bucketloads of reassurance.

Plenty are demanding skip loads.

MPs from ministers down worry that mortgages are about to spiral and voters will know who to blame.

Incidentally, I understand the prime minister was initially reluctant to intervene on Monday.

In the end a statement was issued by the Treasury.

I'm told it is "plain wrong" Liz Truss and the Chancellor Kwasi Kwarteng had a massive barney, what some have described as a "shouting match".

House prices could fall by 10% next year, a mortgage expert has said, as the cost of borrowing rises.

Ray Boulger, senior mortgage technical manager at John Charcol, tells the Today programme the increase in borrowing costs will have a “big impact on the ability of people to buy” as mortgage providers begin to hike rates.

The biggest issue for lenders is currently uncertainty, he says.

Boulger says there has been a huge rise in UK gilt yields - which increases the cost of government borrowing - over the last two or three days.

“That's the fundamental cost that lenders have to pay or dictates the cost lenders have to pay to borrow money. They just don't know where that's going to go, how much higher is it going to go."

He says he expects to see a significant fall in house prices in the next year.

Boulger adds: “I'm suggesting perhaps around 10% next year. A key factor in house prices is how much people could afford on their monthly mortgage.

“So obviously supply and demand is always an issue. But the bigger issue on a sort of grander basis is how much can people afford.”

He says those thinking of buying “are going to rethink those plans” or they “may not buy at all”.

More from the Labour leader, who says the government needs to urgently review the plans it set out in its mini-budget on Friday.

Starmer says: "They've said they might make a further statement in November - that's far too far away, they need to bring that up, make a statement and set out a plan.

"How are you going to fix the problems that you inflicted on the country on Friday?"

He urged the government to "get the Office for Budget Responsibility involved".

The Labour leader is now speaking on BBC Radio 4's Today programme, saying the government has "completely lost control of the economy".

He tells the programme: "I think for many people whose mortgages are going up... that is the cost of this. And what I think will frustrate and anger people is this is self-inflicted."

He says the UK's economic downturn is due to the government's own decisions rather than wider economic problems.

"This is a government that has lost control of the economy and for what? To give tax breaks to those earning hundreds of thousands of pounds whilst working people have to pay more in prices, it's the worst of all situations for the country to find itself in," he adds, referring to the government's decision to remove the 45% tax rate for highest earners.

Labour leader Sir Keir Starmer has criticised the government for paying for the energy price freeze by borrowing and rejecting windfall taxes on oil and gas companies.

Speaking on BBC Radio 5 Live, he says: "We've said there are excess profits from oil and gas companies who've made excess profits they didn't expect to make, and that should be used to contribute towards the cost".

Challenged on why Labour's energy price freeze plans only last for six months, he says: "Every time it's got to the energy price issue, we've been the first to put proposals on the table. We said a windfall tax, we said freeze the energy bills, and the government has reluctantly come to our position on freezing the bills".

He adds that "of course" a new plan will be needed from April when the six months is up.

Image source, PA Media

Before the IMF released its statement, the Bank of England hinted it was prepared to ramp up interest rates in response to the recent slump in the value of the pound.

Its chief economist Huw Pill said the Bank would have to deliver a "significant monetary policy response" to protect sterling.

Pill said that there had been "significant market consequences" after the chancellor announced a series of tax cuts.

It comes as several banks have pulled mortgage deals for new customers.

Read more here.

The International Monetary Fund should assess the government's whole economic strategy, not just measures announced in Friday's mini-budget, a senior Conservative MP and ally of Liz Truss has said.

"This government has only just assumed its responsibilities with this new team of ministers," Sir John Redwood tells Radio 4's Today programme.

"We haven't yet seen the whole policy. We need to see what the overall budgets look like, looking at the spending side as well as the revenue side."

He adds that the IMF's comments reflect "the errors of the past".

"They didn't foresee the big inflation which they triggered, they didn't have sensible advice in good time to see off inflation, and now late in the day when the inflation is very visible for all to see, they're suggesting taking measures to tackle it when the world has moved on."

The pound has dropped 0.95% against the dollar to $1.0634, reversing a marginal 0.4% gain it made on Tuesday.

Sterling collapsed to a 37-year low of $1.0327 on Monday following Chancellor Kwasi Kwarteng's mini-budget on Friday.

It had regained some ground up to the $1.07 mark but has dropped away as markets react to the International Monetary Fund's criticism of the UK's tax-cut plan.

The pound had already been sliding against the dollar in the weeks leading up to the mini-budget, partly down to the wider strength of the US dollar.

It was trading at $1.135 earlier in September - the first time it had fallen below the $1.14 mark in nearly four decades.

Nick Eardley
Chief political correspondent

It's not just the markets and the IMF who are concerned.

There are alarm bells ringing in the political world, too. The chancellor spent some of yesterday trying to shore up support for his strategy.

He held talks with asset managers and others in the financial world about plans for deregulation.

He also spoke with Conservative MPs, urging them to stand firm in supporting the government's economic plans.

There is real concern among some Conservatives about the impact of increased borrowing costs and mortgage costs.

Politically, too, some Tories are worried their reputation for managing the economy is being shredded.

That's allowed Labour to say at its conference in Liverpool that the government has lost control.

There was some surprise in government about how strong the IMF statement was.

Clearly, Downing Street doesn't agree with many of the conclusions.

Image source, Reuters

The International Monetary Fund's criticism of the UK government's plan for tax cuts is "very serious", Labour leader Keir Starmer has said.

Starmer says the IMF's statement shows "what a mess the government have made of the economy".

"This was a step they didn't have to take," he tells LBC radio. "Quite often when the markets are jittery, when the pound falls, it's because of some international event - conflict in Ukraine, a cost-of-living crisis, energy crisis. This is self-inflicted by the government."

He adds that people are "very, very worried this morning".

"Their mortgages are going up. Some people who thought they had a mortgage arrangement last week now haven't got one."

Starmer adds that the government's plan to present a budget in November is "far too long off".

Image source, Getty Images

The IMF's statement has drawn criticism from Lord Frost, a former Brexit minister and ally of Prime Minister Liz Truss.

Speaking to the Telegraph, external, he said: "The IMF has consistently advocated highly conventional economic policies.

"It is following this approach that has produced years of slow growth and weak productivity.

"The only way forward for Britain is lower taxes, spending restraint, and significant economic reform."

He added that Truss and Chancellor Kwasi Kwarteng should "tune out the criticism from those who are still in the intellectual world of Gordon Brown".

Image source, Getty Images

White House economic adviser Brian Deese was asked about the UK's plans at an event hosted by the Economic Club of Washington on Tuesday.

He said he had not been surprised by the negative reaction of the markets and that it was important to focus on "fiscal prudence, fiscal discipline", the Reuters news agency reported.

He added that introducing tax cuts at a time of monetary tightening - meaning when interest rates were being raised - would mean monetary policy would potentially have to be tightened even further.

Image source, Reuters

The decisions made by the International Monetary Fund affect people around the world. But what is the IMF and why is it important?

What is the IMF?

The IMF is an international organisation with 190 member countries. They work together to try to stabilise the global economy.

The fund does three main things to monitor and support the economy:

• Tracking economic and financial events. It monitors how countries are performing and potential risks, like trade fights or Brexit uncertainty
• Advising its members on how to improve their economies
• Issuing short-term loans and assistance to countries who are struggling

The IMF can lend its members a total amount of $1tn.

But the conditions it imposes on countries it lends money to have sometimes been described as "harsh".

Read more here.

Image source, HM Treasury

Chancellor Kwasi Kwarteng is to meet with investment banks on Wednesday as part of efforts to reassure the City about his economic plans.

He is expected to emphasise the reforms ministers will be setting out in the coming weeks that will be intended to boost growth, including measures to further liberalise financial market regulation.

It follows similar meetings on Tuesday at which Kwarteng told City bosses the government had a "credible plan" and was "committed to fiscal discipline".

A former deputy director of the International Monetary Fund has said it is unusual for the fund to make "such strong statements about G7 countries".

Speaking on Radio 4's Today programme, Adnan Mazarei says such statements are "common with regard to emerging market countries with problematic policies, but not often about G7 countries" - the seven richest nations in the world.

Asked whether people should listen to the IMF's statement - after it was criticised by former Brexit minister Lord Frost, who said it has always advocated "highly conventional policies" producing "years of slow growth and low productivity" - Mazarei says such an assessment of the IMF "is not entirely accurate".

He says the IMF has not been "sufficiently critical" of the UK government when it followed austerity policies from 2010 onwards.

He adds there is a fear that the tax cuts are permanent and there is a worry that there is "a policy conflict" between the Treasury and the Bank of England, which is not beneficial for the UK economy.

Simon Jack
Business editor

Image source, Getty Images

City insiders have warned that tax cuts designed to stimulate economic growth might have the opposite effect.

Bankers, bond traders and economists the BBC talked to cast doubt on the government policy that was announced on Friday.

The Chancellor and Prime Minister's guiding star has been that if you put more money in the pockets of consumers and companies the economy should grow.

Tax cuts should therefore produce stronger economic growth.

However, the opposite might be true in this case, with the tax cuts making economic growth harder to achieve, the City of London insiders said.

The unexpectedly large £45bn cut to existing and proposed tax rates has put even more pressure on the Bank of England to raise interest rates faster than was previously contemplated.

Read more here.

Image source, Reuters

The UK government's tax-cut plans have been described as a "blunder" by American billionaire investor Ray Dalio.

Dalio is the founder and co-chief investment officer of Bridgewater Associates, the largest hedge fund in the world.

Writing on Twitter, external, he said: "The panic selling you are now seeing that is leading to the plunge of UK bonds, currency, and financial assets is due to the recognition that the big supply of debt that will have to be sold by the government is much too much for the demand.

"That makes people want to get out of the debt and currency. I can't understand how those who were behind this move didn't understand that. It suggests incompetence.

Here's the full text of the statement released on Tuesday evening by the International Monetary Fund:

"We are closely monitoring recent economic developments in the UK and are engaged with the authorities.

"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.

The UK government has said it will make a "fiscal statement" on 23 November to set out more of its plans.