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Yahoo
28-05-2025
- Business
- Yahoo
Britain has no more capacity to borrow as Starmer's costly U-turns mount
At first glance, the International Monetary Fund's latest forecast for the UK economy looked remarkably positive. Growth will be higher than projected a month ago. The economy will accelerate despite the trade war. Rachel Reeves's strategy was praised as 'credible and growth-friendly'. But beneath the surface are dire warnings. The population is ageing rapidly, putting pressure on the Government to spend ever more on care. Britain's huge debt pile and high interest rates make borrowing difficult. 'Difficult choices' loom on tax and spending. The IMF repeatedly urged Reeves to 'stay the course' on plans to stabilise the finances and bring down annual borrowing. Instead, the run up to the IMF's update was marked by a series of about-turns on benefits and public sector pay that will force the Chancellor to find billions. The Government has abandoned its cuts to winter fuel eligibility, and is looking at dishing out more benefits to parents by reviewing the two-child limit. The IMF warned that such promises can not be funded by borrowing: 'The authorities will need to offset that with other savings measures somewhere else. Our view is that these other measures could be both on the tax or on the spending side,' said Luc Eyraud, the IMF's mission chief in the UK. That is a very diplomatic way of putting it. Effectively the British state is so broke that it cannot afford even tweaks which are relatively modest – at least compared to total government spending, which is on track to hit £1.5 trillion per year later this decade – without clawing the money back elsewhere. Reeves has already bumped into this problem several times. Despite attempting a reset of the finances last autumn in a Budget that saw taxes raised and spending cut, Chancellor was forced to come back for more just months later in the spring. The immediate cause of her woes is the fact that she is sailing so close to the wind, running the finances with a buffer of less than £10bn against her borrowing targets. It means every hiccup in growth, productivity or the path of interest rates can throw her finances off course. The IMF has suggested Reeves 'refine' her fiscal rules and seek to lessen the public attention on the targets, thus avoiding the storm of speculation over tax cuts that occurs every time borrowing costs shift around in bond markets. It proposed tweaks to the way forecasts from the Office for Budget Responsibility (OBR) are used, including 'de-emphasising point estimates of headroom in OBR assessments of rule compliance; establishing a formal process so that small rule breaches do not trigger corrective fiscal action outside of the single fiscal event; or assessing rules only once per year at the time of the fiscal event.' Unfortunately it is not the precise definition of the fiscal rules, nor how neatly the Government hits them, which really matters. The real problem is that the Government has an enormous mountain of debt, agonisingly high interest payments – more than £100bn per year – and faces the threat of worse to come given ructions in the global economy and tensions in financial markets. The fiscal rules are an acknowledgement that the Treasury needs to keep a tight hold on the public purse to avoid a blow up, and loosening the rules or their enforcement is not a way to sidestep that threat. It is a point made by Mel Stride, the shadow Chancellor, who says: 'The IMF have been clear that the first solution should be to leave greater headroom against the fiscal rules.' 'In a context where the Chancellor's credibility is already in tatters, changing the goalposts a second time would run real risks with market confidence.' Even if Reeves sticks to her fiscal rules this decade, the ground is shifting beneath her feet. Britain's population is getting older, putting greater pressure on healthcare costs and leaving a smaller population of taxpayers to pay for care. The IMF warned: 'In the longer term, difficult fiscal choices will likely be needed to address spending pressures and rebuild fiscal buffers. Under current policies, staff analysis suggests spending to be around 8pc of GDP higher by 2050, mainly due to additional outlays on health and pensions from population ageing.' Government spending amounts to around 45pc of GDP now, which would rise firmly above 50pc on these IMF projections. Given that the national debt is already above 100pc of GDP on the watchdog's measure of gross indebtedness, that rise in spending will require major tax rises or spending cuts elsewhere. 'There is limited space to finance this spending through extra borrowing, given high debt and elevated borrowing costs,' the IMF said. 'Unless revenue is increased, for which there is scope, tough policy decisions on spending priorities and the role of the state in certain areas will be needed to better align the coverage of public services with available resources.' Yet taxes are already heading up to their highest level since the Second World War. That this is a global problem only makes the situation worse. Governments around the world are borrowing too much. Donald Trump's latest round of tax cuts add to America's swelling debt. Emmanuel Macron's series of prime ministers have struggled to bring down French borrowing without sparking street protests. Interest rates charged to Japan's government by investors have hit record highs. Agustin Carstens, head of the Bank for International Settlements, known as the central bank for central banks, warned that governments across the world are borrowing too much and risk destroying trust in money and in the financial system, with potentially devastating ramifications. 'It is essential for fiscal authorities to curb the relentless rise in public debt,' Carstens said in a speech in Japan. 'The low interest rate environment that followed the global financial crisis flattered fiscal accounts. Large deficits and high debt seemed sustainable, allowing fiscal authorities to avoid hard choices. But the days of ultra-low rates are over. 'Fiscal authorities have a narrow window to put their house in order before the public's trust in their commitments starts to fray. Markets are already waking up to the fact that some paths are not sustainable.' That is a warning that interest rates could spiral if debt investors refuse to back a government's borrowing plans. 'Fiscal consolidation in many economies needs to start now. Muddling through is not enough,' he warned. 'In many countries, current policies imply steadily rising public debt in the coming decades. Pressures for more public spending will only increase, not least due to population ageing, climate change and, in many jurisdictions, higher defence spending.' Carstens did not single out any countries by name, but his words echo closely the IMF's fears for Britain's long-term debt. Their warnings show Labour's spending dreams risk a collision course with financial reality. Broaden your horizons with award-winning British journalism. Try The Telegraph free for 1 month with unlimited access to our award-winning website, exclusive app, money-saving offers and more. Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
Telegraph
28-05-2025
- Business
- Telegraph
Britain has no more capacity to borrow as Starmer's costly U-turns mount
At first glance, the International Monetary Fund's latest forecast for the UK economy looked remarkably positive. Growth will be higher than projected a month ago. The economy will accelerate despite the trade war. Rachel Reeves's strategy was praised as 'credible and growth-friendly'. But beneath the surface are dire warnings. The population is ageing rapidly, putting pressure on the Government to spend ever more on care. Britain's huge debt pile and high interest rates make borrowing difficult. 'Difficult choices' loom on tax and spending. The IMF repeatedly urged Reeves to 'stay the course' on plans to stabilise the finances and bring down annual borrowing. Instead, the run up to the IMF's update was marked by a series of about-turns on benefits and public sector pay that will force the Chancellor to find billions. The Government has abandoned its cuts to winter fuel eligibility, and is looking at dishing out more benefits to parents by reviewing the two-child limit. The IMF warned that such promises can not be funded by borrowing: 'The authorities will need to offset that with other savings measures somewhere else. Our view is that these other measures could be both on the tax or on the spending side,' said Luc Eyraud, the IMF's mission chief in the UK. That is a very diplomatic way of putting it. Effectively the British state is so broke that it cannot afford even tweaks which are relatively modest – at least compared to total government spending, which is on track to hit £1.5 trillion per year later this decade – without clawing the money back elsewhere. Reeves has already bumped into this problem several times. Despite attempting a reset of the finances last autumn in a Budget that saw taxes raised and spending cut, Chancellor was forced to come back for more just months later in the spring. The immediate cause of her woes is the fact that she is sailing so close to the wind, running the finances with a buffer of less than £10bn against her borrowing targets. It means every hiccup in growth, productivity or the path of interest rates can throw her finances off course. The IMF has suggested Reeves 'refine' her fiscal rules and seek to lessen the public attention on the targets, thus avoiding the storm of speculation over tax cuts that occurs every time borrowing costs shift around in bond markets. It proposed tweaks to the way forecasts from the Office for Budget Responsibility (OBR) are used, including 'de-emphasising point estimates of headroom in OBR assessments of rule compliance; establishing a formal process so that small rule breaches do not trigger corrective fiscal action outside of the single fiscal event; or assessing rules only once per year at the time of the fiscal event.' Unfortunately it is not the precise definition of the fiscal rules, nor how neatly the Government hits them, which really matters. The real problem is that the Government has an enormous mountain of debt, agonisingly high interest payments – more than £100bn per year – and faces the threat of worse to come given ructions in the global economy and tensions in financial markets. The fiscal rules are an acknowledgement that the Treasury needs to keep a tight hold on the public purse to avoid a blow up, and loosening the rules or their enforcement is not a way to sidestep that threat. It is a point made by Mel Stride, the shadow Chancellor, who says: 'The IMF have been clear that the first solution should be to leave greater headroom against the fiscal rules.' 'In a context where the Chancellor's credibility is already in tatters, changing the goalposts a second time would run real risks with market confidence.' Even if Reeves sticks to her fiscal rules this decade, the ground is shifting beneath her feet. Britain's population is getting older, putting greater pressure on healthcare costs and leaving a smaller population of taxpayers to pay for care. The IMF warned: 'In the longer term, difficult fiscal choices will likely be needed to address spending pressures and rebuild fiscal buffers. Under current policies, staff analysis suggests spending to be around 8pc of GDP higher by 2050, mainly due to additional outlays on health and pensions from population ageing.' Government spending amounts to around 45pc of GDP now, which would rise firmly above 50pc on these IMF projections. Given that the national debt is already above 100pc of GDP on the watchdog's measure of gross indebtedness, that rise in spending will require major tax rises or spending cuts elsewhere. 'There is limited space to finance this spending through extra borrowing, given high debt and elevated borrowing costs,' the IMF said. 'Unless revenue is increased, for which there is scope, tough policy decisions on spending priorities and the role of the state in certain areas will be needed to better align the coverage of public services with available resources.' Yet taxes are already heading up to their highest level since the Second World War. That this is a global problem only makes the situation worse. Governments around the world are borrowing too much. Donald Trump's latest round of tax cuts add to America's swelling debt. Emmanuel Macron's series of prime ministers have struggled to bring down French borrowing without sparking street protests. Interest rates charged to Japan's government by investors have hit record highs. Agustin Carstens, head of the Bank for International Settlements, known as the central bank for central banks, warned that governments across the world are borrowing too much and risk destroying trust in money and in the financial system, with potentially devastating ramifications. 'It is essential for fiscal authorities to curb the relentless rise in public debt,' Carstens said in a speech in Japan. 'The low interest rate environment that followed the global financial crisis flattered fiscal accounts. Large deficits and high debt seemed sustainable, allowing fiscal authorities to avoid hard choices. But the days of ultra-low rates are over. 'Fiscal authorities have a narrow window to put their house in order before the public's trust in their commitments starts to fray. Markets are already waking up to the fact that some paths are not sustainable.' That is a warning that interest rates could spiral if debt investors refuse to back a government's borrowing plans. 'Fiscal consolidation in many economies needs to start now. Muddling through is not enough,' he warned. 'In many countries, current policies imply steadily rising public debt in the coming decades. Pressures for more public spending will only increase, not least due to population ageing, climate change and, in many jurisdictions, higher defence spending.' Carstens did not single out any countries by name, but his words echo closely the IMF's fears for Britain's long-term debt. Their warnings show Labour's spending dreams risk a collision course with financial reality.
Yahoo
27-05-2025
- Business
- Yahoo
IMF upgrades UK growth but warns of looming trade war hit
Britain's economy will grow faster than expected this year as lower interest rates improve household spending and encourage more businesses to invest, according to the International Monetary Fund (IMF). In its latest assessment for the UK, the global watchdog upgraded its growth forecast for this year to 1.2pc, up from the 1.1pc it predicted just last month. Luc Eyraud, the IMF's mission chief to the UK, said the 0.7pc growth in the first three months of the year was 'stronger than we expected' thanks to mmore robust business investment. It comes despite the Fund predicting that the economy will be 0.3pc smaller next year than would have otherwise been the case without Donald Trump's global trade war. However, it still believes that GDP will grow by 1.4pc next year, as it said Britain's prospects will be improved by an overhaul of planning rules. The IMF said: 'The forecast assumes that global trade tensions lower the level of UK GDP by 0.3pc by 2026, due to persistent uncertainty, slower activity in UK trading partners, and the direct impact of remaining US tariffs on the UK.' Trade deals struck with the US, India and the EU in recent weeks should help some industries such as cars and steel, the IMF added, but are unlikely to support the wider economy unless they are followed up with more comprehensive agreements. 'They do not have a large macroeconomic impact,' said Mr Eyraud. 'These agreements are just first steps towards broader trade agreements. 'The new deals are just the beginning for us. We will wait to see the full agreement to assess whether they have significant macroeconomic implications.' The figures still leave Sir Keir Starmer and Rachel Reeves, his Chancellor, in a tight financial spot as the IMF said it was critical that the Government 'stay the course' on its plans to reduce borrowing instead of ramping up spending further. Last week, the Prime Minister announced an about-turn on his flagship policy to withhold winter fuel payments from some pensioners, while the Government is also considering lifting the two-child limit on benefits to families. Mr Eyraud said: 'We take note of the announcement of the PM to change the winter fuel payments. From the IMF perspective, it is very important that the authorities stay the course, that they stick to their commitment to reduce fiscal deficits gradually over the medium term. 'The authorities will need to offset that with other savings measures somewhere else. Our view is that these other measures could be both on the tax or on the spending side.' The IMF also warned that finances were on a dangerous path in the longer term, as rising pension and healthcare spending would leave future governments having to choose between significantly raising taxes or slashing spending. Ms Reeves hailed the upgraded forecast. She said: 'The UK was the fastest growing economy in the G7 for the first three months of this year and today the IMF has upgraded our growth forecast. 'We're getting results for working people through our Plan for Change – with three new trade deals protecting jobs, boosting investment and cutting prices, a pay rise for three million workers through the National Living Wage, and wages beating inflation by £1,000 over the past year.' Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
BBC News
27-05-2025
- Business
- BBC News
IMF raises UK growth forecast as it warns on tax and spending
The UK economy is forecast to grow slightly more than previously expected in 2025, but the International Monetary Fund (IMF) has warned that the Chancellor must stick to her rules on tax and its annual health-check for the economy, the IMF predicted growth of 1.2% this year, rising to 1.4% in said an economic recovery was "under way" after a boost in the first three months of the forecast from the influential body comes just over a month after it downgraded its expectations for the UK from 1.6% in 2025 to 1.1%. Luc Eyraud, the IMF's UK mission chief, said growth has been "very strong" in the first three months of the figures released this month revealed the economy was boosted by increases in consumer spending and business investment, but the figures were during the period before the US imposed import tariffs and UK employer taxes increased in April. The IMF praised the government's planning reforms and infrastructure investment plans, which it said would increase growth "if properly implemented".But it added that a "high level of global uncertainty, volatile financial market conditions, and the challenge of containing day-to-day spending" mean the Chancellor Rachel Reeves will face "difficult choices" to balance taxation with spending in the long suggested some changes to the government's self-imposed fiscal rules, including cutting the number of times the Office for Budget Responsibility (OBR) produces an assessment of the UK's finances to once a year, rather than rules are self-imposed by most governments in wealthy nations and are designed to maintain credibility with financial markets. The government has repeatedly said its rules are "non-negotiable".The chancellor has two main rules which she has argued will bring stability to the UK economy:day-to-day government costs will be paid for by tax income, rather than borrowingto get debt falling as a share of national income by the end of this parliament in 2029/30. Global trade tensions Growth next year will be weighed down by global trade tensions, including less activity among the UK's trading partners, the impact of US President Donald Trump's tariffs and "persistent uncertainty", the IMF's report combination of these factors will reduce next year's growth to the tune of 0.3% by 2026, it the IMF pointed to trade agreements the UK has struck with countries like EU, India and the US, saying they demonstrated the government's commitment to "establishing a more predictable environment for UK exporters".The report comes just over a month after the IMF cut its expectations for UK growth this year to 1.1%, which it said was due to an increase in borrowing costs, US tariffs and a hit from added at the time that it expected UK inflation to slow to 2.2% by 2026, close to the Bank of England's 2% this month the Office for National Statistics said inflation rose unexpectedly in April to 3.5%, from 2.6% in March. On Tuesday, the IMF said this rise in inflation will last until the second half of this year, returning to target "later in 2026".
