IMF warns Britain against more pre-election tax cuts

By William Schomberg and Andy Bruce

LONDON (Reuters) -The International Monetary Fund warned Britain's government on Tuesday that it was on course to miss its debt target and should not cut taxes before an election later this year, with tax rises likely to be needed in future.

The IMF increased its projection for British economic growth in 2024 to 0.7% from an April forecast of 0.5%, an upgrade that reflected strong early 2024 growth data and will be welcomed by Prime Minister Rishi Sunak who is struggling to win over voters.

But its annual report on Britain's economy also criticised policies of Sunak's government, in particular recent tax cuts in the form of lower social security contributions.

The IMF said the Bank of England should cut interest rates two or possibly three times this year, by a quarter-point on each occasion, although it saw inflation only returning to the BoE's target on a durable basis in early 2025.

The Fund said Britain was set for a "soft landing" after a short, shallow recession in the second half of 2023.

Finance minister Jeremy Hunt focused on the upgrade to the immediate economic outlook, saying the IMF had agreed with his recent comments that the UK economy has turned a corner.

"It is time to shake off some of the unjustified pessimism about our prospects," he said in a statement.

But the Fund said growth would remain stuck in a slow gear and debt was on course to rise. It forecast that public sector net debt excluding the BoE's bond-buying programme will hit 97% of GDP in the 2028/29 financial year.

"We are genuinely concerned, not just for the UK, for all countries that have used fiscal buffers extensively, that they must do more to rebuild these buffers," IMF Managing Director Kristalina Georgieva told a news conference.

In March, Britain's budget watchdog - the Office for Budget Responsibility - said the government was on track to meet its target to get debt falling as a share of GDP in the last year of its five-year forecast horizon, albeit narrowly.

The Fund said it saw more spending ahead than in the UK's forecasts and Britain needed to tighten its belt - through tax increases or spending cuts - by an average of around 1 percentage point of GDP, or roughly 30 billion pounds ($38 billion) a year, to stabilise debt by the end of the decade.

It said it would have advised against the social security rate cuts already introduced by the government given their heavy cost of about 0.5% of GDP.

TAXES SHOULD GO UP

Furthermore, it said Britain should consider new revenue-raising measures such as higher carbon and road-usage taxation, a broadening of the value-added tax and inheritance tax bases, and reforming capital gains and property taxation.

The state pension should be indexed to inflation - and no longer the "triple-lock" system that includes wage growth - and there could be more charges for public services alongside technology investment by the state.

The IMF said weak investment in the past was now weighing on the growth rate of Britain's economy and government efforts to rein in immigration presented another headwind to growth.

"Against the backdrop of these challenges, as a general principle, staff would advise against additional tax cuts, unless they are credibly growth-enhancing and appropriately offset by high-quality deficit-reducing measures," the IMF said.

Sunak and Hunt are expected to give more sweeteners to voters after the summer in a final attempt to bolster support for their Conservative Party before an election that opinion polls suggest will be won by the opposition Labour Party.

($1 = 0.7865 pounds)

(Writing by William SchombergEditing by Christina Fincher)