IMF cautions UK on its budget concessions

In the fight for the ruling Conservative Party leadership, Prime Minister Liz Truss showed no doubts that she will implement tax cuts to help businesses to come out of the two-year Covid-19 economic breakdown by promising tax cuts across the board, and to help people overcome the “crisis of cost of living” like mounting power bills through sufficient conditions.

Her main rival Rishi Sunak, who was the Chancellor of Exchequer with Prime Minister Boris Johnson, called the Truss plan disastrous and unrealistic. But Truss stuck to her stance because she believed that it is what it meant to be a Conservative – cut taxes for the captains of industry so that they will grow the economy. And when won the leadership battle and became prime minister, she did not go back on her promise. So her Chancellor of Exchequer Kwasi Kwarteng announced tax cuts, from 20 per cent to 19 per cent in bottom bracket, and from 45 per cent to 40 per cent at the top end. Stamp duty was reduced considerably for first-time house-buyers.

The Truss-Kwarteng seems to believe that one way of spurring economic growth was to cut taxes so that the money not paid to the government through taxes would be invested in the economy to help it grow, which in turn will create jobs. This is a neat theoretical construct, which rarely translates into action. But the immediate effect of Kwarteng’s budget was that the pound crashed, and it crashed further as the United States Federal Reserve increased interest rate by another 75 basis points. The International Monetary Fund (IMF), the lender of last resort in the global financial setup, was worried about the consequences of Kwarteng’s budget proposals and it issued a warning, and it is very rare of the IMF to warn a developed and rich economy like Britain about the need to rein in budgetary giveaways. It is usually the case that IMF has been in the habit of warning developing and poor countries, which are most likely to end up at the door of the IMF.

It is quite unlikely that Britain will knock the doors of the IMF though it did happen once in the 1970s. But is interesting to note what the IMF had to say to Britain: “We are closely monitoring recent economic development in the UK and are engaged with the authorities. Given elevated inflation pressures in many countries, including the UK, we do not recommend large and untargeted fiscal packages at this juncture as it is important that fiscal policy does not work at cross-purposes to monetary policy.”

That is government should not go on a spending spree and push inflation up at a time when the central bank is trying to control inflation through calibrated increase in interest rate. This is exactly a warning that IMF would issue to middling economies struggling to come out of a shrinking or collapsing economy.

That the IMF should be adopting the same unrelenting language towards Britain shows a change in power equations. Britain is indeed a struggling economy and it is indeed on verge of economic collapse and no one has any doable plan to avoid it. What Truss and Kwarteng had adopted has all the marks of recklessness, but it looks like that it was a desperate remedy to tackle a desperate situation.

The IMF it seems like central banks everywhere is worried about inflation, while governments like that of Truss facing economic distress of the people cannot adopt austerity measures. Truss is, however, confident that the Kwarteng budget will help the economy grow despite the risks of inflation. Is it a calculated risk? Perhaps it is, and if it works Truss can pat herself on the back.