Reeves risks missing fiscal targets and should consider tax rises, says IMF
In a final version of an annual report on the UK economy, the Washington-based organisation said changes introduced by the chancellor to the government's deficit reduction plans had enhanced the credibility and effectiveness of fiscal policy.
'Risks to this strategy must be carefully managed. In an uncertain global environment and with limited fiscal headroom, fiscal rules could easily be breached if growth disappoints or interest rate shocks materialise,' the IMF said.
The Fund also said the risk of overly-frequent changes to tax and spending policy could be reduced by measures including the creation of more fiscal room for manoeuvre by Reeves to meet her targets.
'The first best (option) would be to maintain more headroom under the rules, so that small changes in the outlook do not compromise assessments of rule compliance,' it said.
The IMF said that delivering Reeves's plans to increase economic growth 'involves significant challenges given limited fiscal space, the breadth of the reforms, and the volatile external environment' amid US president Donald Trump's trade war.
In its May report, the IMF said Reeves should refine her fiscal rules to prevent the need for emergency spending cuts.
Since then the government's high-stakes welfare U-turn has put further pressure on the public finances, and Reeves prepares for a tough autumn budget amid mounting speculation over the need for large tax rises.
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In response to Friday's report, Reeves said that the Fund had backed her choices for the UK economy to recover and her plans would 'tackle the deep-rooted economic challenges that we inherited in the face of global headwinds'.
Reeves is under pressure to raise taxes later this year to remain on course to meet her budget targets, having already increased social security contributions paid by employers and along with revenue-raising measures in late 2024.
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