The International Monetary Fund has warned that the British state will swell to more than half the total size of the UK economy under the government’s current plans. The IMF sounded the alarm on “tough policy decisions” needed to meet rising spending.
Total public expenditure is projected to grow by eight percentage points over the next 25 years based on current policies, the UN-run agency said, citing growing spending on health care and pensions amid an ageing British population.
That would take state spending from the 45 per cent share of GDP estimated by the Office for Budget Responsibility for 2025 to as much as 53 per cent by 2050, the highest level seen since the 1940s, with the brief exception of the 2020 coronavirus lockdown when parts of the economy were temporarily shuttered.
The IMF said further tax rises would be needed to meet the increased expenditure, because “there is limited space to finance this spending through extra borrowing, given high debt and elevated borrowing costs.” The fund also warned Chancellor Rachel Reeves not to breach her already precarious fiscal headroom rules or risk a market backlash that could wreck Labour’s (government’s) budget plans.
Any additional spending would need to be covered by tax rises or cuts elsewhere, the IMF said, urging the government “to stay the course and deliver the planned deficit reduction over the next five years to stabilise net debt and reduce vulnerability to gilt market pressures.” The economic agency projected UK growth to rise 1.2 per cent in 2025 and 1.4 per cent in 2026, but cautioned that market shocks and global trade tensions would derail Britain’s growth prospects by as much as 0.3 per cent.
“Materialization of these risks could result in market pressures, put debt on an upward path, and make it harder to meet the fiscal rules, given limited headroom,” the IMF said.
The warning comes amid reports Reeves is plotting to reverse previous cuts in winter fuel allowances and child benefit caps, moves which would add billions to the size of the government’s budget and intensify concerns of further tax rises ahead.
Mel Stride MP, shadow (Conservative) Chancellor of the Exchequer, said: “Rachel Reeves has already fiddled her fiscal targets to allow her to borrow hundreds of billions more over this parliament.
“She has loosened the rules and then constantly teetered on the brink of breaking them. 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.” On another issue – the boss of EnQuest has slammed the windfall tax on oil and gas firms as doing “irreversible damage” to the industry and “driving job losses across the sector”.
Amjad Bseisu, London-listed EnQuest’s chief executive, called for the North Sea tax to be scrapped in an operations update after claiming it makes the UK a less attractive place to invest. The UK Energy Profits Levy was introduced in May 2022 and applies to oil and gas companies operating in the North Sea.
It is designed to tax the extra profits these companies made due to surging energy prices after Russia’s invasion of Ukraine. Initially, the rate was 25 per cent but it later jumped to 35 per cent in January 2023. The tax has been extended by Chancellor Reeves to run until March 2030, but has a “price floor” mechanism, which allows it to end early if prices fall significantly.
London-listed company Harbour Energy also slammed the government’s “punitive fiscal position” last month. Bseisu argued: “The recent stepdown in commodity prices has further amplified calls for UK government to remove the Energy Profits Levy and return the North Sea to a position of global competitiveness.”
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