Rachel Reeves was given political cover by the IMF to “improve” the financial framework to prevent changes to the economic course between fall budgets.
However, the fund also warned the UK Prime Minister that the fiscal room for her finances was inadequate, requiring additional tax increases or spending reductions “in the event of a shock.”
The IMF on Tuesday said Reeves could “promote further policy stability” by having only one office for budgetary liability assessments for financial rules self-imposed annually at the budget, rather than the current two annual reviews.
According to some appropriate officials, the idea is being discussed in the Treasury Department. However, Reeves’ allies said their commitment to fiscal rules that require a balance between daily spending and revenue by 2029-30 remains “unnegotiable.”
Reeves was forced to announce a £14 billion plan to correct the UK’s tense finances in a spring statement in March.
The Prime Minister’s ability to grasp spending has been further raised questions after the decision announced last year to reverse the fuel subsidies for pensioners and consider disposing of child benefits for the two.
At the same time, due to higher borrowing costs, Reeves’ £9.9 billion financial “headroom” has been eliminated.
Reeves’ headroom is easily wiped out by small forecast changes made by OBR. This generates two “economic and financial outlooks” typically in the spring and fall.
“We are pleased to announce that we are committed to providing a wide range of services,” said Luc Eyraud, IMF UK mission chief. “To reduce short-term policy responsiveness, the first solution is to have higher headroom.
Reeves’ allies said they will “always discuss ways to improve the fiscal framework,” but there is no plan at the political level to move to a single annual OBR assessment of fiscal rules.
The IMF’s recommendations were made in the UK economy’s annual health check, and in 2025 its forecast economic growth was reduced to 1.2% from 1.1%. Before Donald Trump’s tariffs, the IMF had predicted that the economy would expand by 1.6% this year.
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Encouraging Reeves to “keep the course and realize planned deficit reductions over the next five years,” the IMF also warned of “significant risks” due to global uncertainty and unstable market conditions.
The UK’s medium-term growth was projected to be “silent” at 1.4% due to “low productivity.”
Reeves said: “The UK has been the fastest growing economy in the G7 for the first three months of the year, and today the IMF has upgraded its growth forecast.”
But the prime minister is increasingly boxed by her fiscal rules, with some economists warning that taxes must be raised again in the fall budget.
The fund “added further improvements” of fiscal rules to wipe out government headroom and avoid minor economic revisions that put pressure on frequent policy changes.
Recommended IMF reforms include moving to forecasts once a year and implementing a formal process to prevent minor rule violations from causing corrective actions.
The fund warned that limited headroom in the UK means additional tax or expenditure measures will be required “in the event of a shock,” adding that over the next five years there will be a reduction in the deficit planned “to stabilize net debt and reduce vulnerability to pressure in the gold leaf market.”
The findings came two weeks before the high stakes spend review, and Reeves is expected to cut the budget for the Whitehall department.
Rising borrowing costs have already erod slim headroom since October last year, forcing the government to switch to short-term borrowings to lower the interest bill.
In its report, the IMF said Reeves’ spending plan is “reliable and growth-friendly” and “a good balance between supporting growth and protecting fiscal sustainability.” However, it warned of the risks of shortcomings due to sustained global trade uncertainty and increased household savings.
The fund called on Reeves to prioritize “three most binding constraints on growth,” namely stability, capital and skill.
Recommended
The government’s growth agenda focused on the right areas, but careful prioritization of structural reform was key to driving growth, the IMF noted.
The IMF said difficult financial choices regarding higher health and pension costs from the UK’s aging population also need to be addressed in the long term.
The IMF called on the Bank of England to gradually ease “while maintaining flexibility in light of rising uncertainty,” saying monetary policy has also become “more complicated” after the recent pickup of inflation.
According to official data last week, inflation jumped to 3.5% in April’s 15-month high, 3.5% in 15-month 3.5%.
