IMF warns UK is at risk of ‘adverse market reaction’ without action on debt
Government debt is on course to continue rising through the 2020s, surpassing GDP and putting the UK at risk of an “adverse market reaction”.
According to the International Monetary Fund’s (IMF) latest fiscal monitor, gross government debt will climb to 108 per cent of GDP by 2029, up from around 100 per cent of GDP at the moment.
Like most advanced economies, the UK is facing a combination of slowing growth and growing pressures on public spending.
The Washington-based body projected that government spending would stand at 42.7 per cent of GDP in 2029, well above the 38.7 per cent recorded in 2019.
The tax burden will also increase, rising as far as 39.3 per cent of GDP by 2029. That would be up from 36.3 per cent pre-pandemic, but still not enough to address the increase in government spending.
The report lays bare the challenging fiscal situation facing Chancellor Rachel Reeves as she prepares her first Budget.
Reeves is reportedly seeking to raise £40bn through tax rises and spending cuts to fund an increase in public sector spending. The Chancellor will also likely reform the fiscal rules to enable more public investment, which could grow the debt pile further.
The IMF urged the government to take action sooner rather than later to stop debt rising unsustainably.
“In countries where debt is projected to increase further…delaying action will make the required adjustment even larger,” it said, pointing to the UK as well as France, Italy and the US.
“Waiting is risky: country experiences show that high debt can trigger adverse market reactions and constrains room for budgetary manouevre in the face of negative shocks.”
The IMF suggested that welfare reform should be a “key priority” in advanced economies, because expenditure makes up a “large and rigid” share of the government’s budget.
It also suggested that there was scope to raise further revenue in the UK through tax reform. The IMF particularly singled out VAT exemptions as an area to target.