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The UK government’s proposal for tax cuts has drawn direct criticism from the IMF (International Monetary Fund), which has issued a warning that the measures could exacerbate the cost-of-living crisis.
The IMF stated unusually directly that the measure would probably raise inequality and add to the pressures driving up prices.
Markets have already expressed concern over the plans, which has caused the pound to crash. However, the administration claims that the actions will spark economic expansion.
Following the IMF’s concerns, the pound dropped 0.7% to $1.06 on Wednesday morning. It follows the currency’s Monday record-low low of almost $1.03.
On Friday, Chancellor Kwasi Kwarteng introduced the nation’s largest tax reform proposal in fifty years. However, the £45 billion reduction has led to worries that government borrowing may rise along with interest rates.
One of the main ways the IMF helps to stabilize the world economy is by serving as an early warning system. It acknowledged that the plan was intended to spur growth but cautioned that the reductions would quicken the rate of price increases, which the UK central bank is attempting to slow.
It added that the nature of the UK measures would probably lead to a rise in inequality.
IMF wants the UK governemnt to re-evaluate
According to the IMF, the government’s release of a fiscal plan on November 23 allowed the IMF to “re-evaluate” tax policies, particularly those that favor high-income earners.
The UK government’s proposals, among other things, would eliminate the top rate of income tax and the cap on bankers’ bonuses.
Days of financial chaos followed the announcement on Friday as investors sold the pound and UK debt. In light of the unpredictability, some of the largest lenders in the nation also halted mortgage transactions.
The Treasury claimed that its main objective was to expand the economy and increase everyone’s standard of living.
It also said that Mr. Kwarteng was scheduled to release his medium-term economic strategy on November 23. This plan would call for lowering UK debt’s long-term proportion to GDP.
Former IMF deputy director Adnan Mazarei claimed that while the G7 countries weren’t frequently mentioned, the foundation frequently made strong statements about emerging market nations with questionable policies.
He claimed that it demonstrated the IMF’s concern that tax cuts would remain in place permanently and that additional borrowing would be required to pay for the budget. It was also concerned about growing inflation, necessitating Bank of England interest rate increases.
The Bank of England gave notice on Tuesday that it was prepared to raise interest rates due to the decline in the pound’s value.
Huw Pill, the Bank’s senior economist, stated that the Bank “cannot be inattentive” to the recent developments.
To safeguard the pound, he warned, the Bank would need to make “a strong monetary policy reaction.”
This is an unusually direct warning from the IMF, suggesting that Kwasi Kwarteng’s mini-Budget binge of £45 billion may not only have been poorly planned and risk harsher rate increases but also may have increased income inequality.
Tax reductions for the wealthy are a key component of the Truss administration’s growth strategy, which is intended to benefit society at large by fostering investment, innovation, and job growth.
But a 2020 study by researchers at the London School of Economics, which looked at the impact of similar measures over five decades in developed countries, concluded that they had little effect on growth or employment. Instead, according to the analysis, they were more likely to exacerbate the gap between the rich and the poor.
Large-scale uniform tax cuts in the UK would be a mistake, a top IMF official warned me at the very beginning of the Conservative leadership contest.
Instead, as the crisis in energy prices has worsened, it has called for policies that are geared toward the least fortunate. And when the Chancellor announces the next phase of his plans in November, it explicitly advises the government to concentrate on that.
So far, there is little evidence that those calls will be taken seriously.