The next government will have to find £30bn of tax rises or spending cuts to get debt down as the economy struggles with a post-lockdown surge in worklessness, the International Monetary Fund (IMF) has warned.
The Fund said Rishi Sunak and Sir Keir Starmer both faced “tough choices” if they win the next election, warning the prime minister against further tax cuts in the short-term despite an improved economic outlook.
The IMF upgraded its UK growth forecast this year from 0.5pc to 0.7pc as it called time on an era of high inflation.
It also backed the Government’s plans to “contain” Britain’s soaring welfare bill, adding that those “capable of work” should be “incentivised to do so”.
However, the Fund warned that Chancellor Jeremy Hunt’s overall plans for public spending were not credible and would leave Britain’s debt mountain on an ever-rising path.
It said higher taxes or deeper spending cuts will be needed in the next parliament to stop debt from matching the size of the economy.
The IMF said spending pressures from an ageing population and weak productivity growth were being exacerbated by the worst sickness crisis on record.
Around 2.8 million people of working age are not in the workforce due to ill health, including mental health conditions such as anxiety and depression. This is up from around 2 million before the 2020 lockdown.
There are 9.4 million people of working age overall who are neither in work nor looking for a job in the UK, a decade-high.
The IMF said it was important to “improve health services for those with disabilities [including mental health], while ensuring that those capable of work are incentivised to do so and are adequately assisted through training, coaching and integrated health support, building on recent reforms”.
Despite the short-term growth upgrade, the Fund warned that the UK’s longer-term prospects remained “subdued due to weak productivity and somewhat higher than expected inactivity levels due to long-term illness”.
The Washington-based institution raised the prospect of taxing electric vehicles or increasing inheritance tax to help keep debt down as it renewed its call to scrap the triple-lock on pensions. Reforms to property taxes could also allow the Government to scrap stamp duty, it added.
The IMF suggested that future governments would need to start charging for more public services, opening the door for the end of the NHS being free at the point of use.
In its latest health check of the UK economy, the IMF said: “Difficult choices will need to be made over the medium term to stabilise public debt, given significant pressures on public services and critical investment needs.”
The IMF did not specify any public services that the UK could start charging for.
However, Mr Sunak raised the prospect of charging people in England £10 if they miss GP or hospital appointments when he was running to become Tory leader. He scrapped the pledge after medics warned it would threaten the NHS’s fundamental principle of being free at the point of use.
The IMF repeated its criticism of Mr Hunt’s decision to slash National Insurance in the spring Budget and Autumn Statement. While it admitted the Chancellor’s tax cuts would get more people working, the Fund said they would also come at a “significant cost”.
It said: “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.
“Staff would have recommended against the National Insurance rate cuts, given their significant cost” of £10bn a year. Public spending is currently projected to grow by 1pc in real terms in the next parliament.
However, the IMF believes public spending will need to grow at double this rate in order to get debt down while addressing health spending needs. Unprotected Whitehall departments outside the NHS, education and defence therefore face the prospect of deep real term cuts in the next parliament.
Its analysis shows that stabilising debt by the end of the decade will require savings of “around one percentage point” of GDP – or around £28bn a year in today’s prices.
This could be delivered either through spending cuts or “raising additional revenue from higher carbon and road-usage taxation, broadening the VAT and inheritance tax bases, and reforming capital gains and property taxation (which could also allow a reduction in stamp duty)”.
Mr Hunt said the IMF’s report showed pessimism about the economy was “unjustified”.
He said: “Today’s report clearly shows that independent international economists agree that the UK economy has turned a corner and is on course for a soft landing.
“The IMF have upgraded our growth for this year and forecast we will grow faster than any other large European country over the next six years – so it is time to shake off some of the unjustified pessimism about our prospects.”
The IMF also urged the Bank of England not to wait too long to cut interest rates, warning of a “risk of delayed easing” that could “stall or even reverse the recovery”, undermining Threadneedle Street’s ability to keep inflation at its 2pc target.
The Fund called for three cuts by the end of this year, taking the base rate from 5.25pc to 4.5pc. It expected interest rates to stand at around 3.5pc by the end of next year, which it said would help to boost economic growth in 2025 to 1.5pc.
Official figures on Wednesday are expected to show inflation fell to around 2.1pc in April, from 3.2pc in March.
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