A BBC report by Natalie Sherman and Tom Espiner summarizes the controversy.
The International Monetary Fund has openly criticised the UK government over its plan for tax cuts…In an unusually outspoken statement, the IMF said the proposal was likely to increase inequality and add to pressures pushing up prices. …Chancellor Kwasi Kwarteng unveiled the country’s biggest tax package in 50 years on Friday. But the £45bn cut has sparked fears that government borrowing could surge along with interest rates. …Lord Frost, the former Brexit minister and close ally of Prime Minister Liz Truss, criticised the IMF’s statement. …”The IMF has consistently advocated highly conventional economic policies. It is following this approach that has produced years of slow growth and weak productivity. The only way forward for Britain is lower taxes, spending restraint, and significant economic reform.” …Moody’s credit rating agency said on Wednesday that the UK’s plan for “large unfunded tax cuts” was “credit negative” and would lead to higher, persistent deficits “amid rising borrowing costs [and] a weaker growth outlook”. Moody’s did not change the UK’s credit rating.
So what should be done about the IMF’s misguided interference? Writing for the Spectator in the U.K., Kate Andrews has some observations about the underlying philosophical and ideological conflict..
…the International Monetary Fund has weighed in on the UK’s mini-Budget, offering a direct rebuke of Liz Truss and Kwasi Kwarteng’s tax cuts. …its spokesperson said…‘Given elevated inflation pressures in many countries, including the UK, we do not recommend large and untargeted fiscal packages at this juncture’… But this rebuke from the IMF is the kind of battle the Truss camp might be happy to have. …The IMF takes a political stance on inequality, viewing its reduction as a good thing in itself. Truss and Kwarteng reject this premise – summed up in the Chancellor’s statement last Friday when he called for the end of redistribution politics – and think it’s far more important to focus on ‘growing the size of the pie.’ The IMF’s ‘intervention’ is likely to become an example of the ‘Treasury orthodoxy’ that Truss was so vocal about during the leadership campaign: her belief that a left-wing economic consensus will not tolerate any meaningful shake-up of the tax code or supply-side reform.
Truss and Kwarteng are correct to reject the IMF’s foolish – and immoral – fixation on inequality. All you really need to know is that the IMF publishes research implying it is okay to hurt poor people if rich people are hurt by a greater amount.
Let’s close by addressing whether tax cuts are bad for Britain’s currency and financial markets. Paul Marshall explained the interaction (and non-interaction) of fiscal and monetary policy in a column for the U.K.-based Financial Times.
Since 2010, the G7 policy framework has been one of tight fiscal and loose monetary policy. …This combination of fiscal austerity and monetary largesse has not been a success. Austerity has not prevented government debt ratios steadily climbing to historic highs. …Meanwhile quantitative easing has fuelled asset inflation for the super-rich and has more or less abolished risk pricing in financial markets. And…it has produced inflation which is still out of control. But now the global policy consensus is in the process of pivoting… A distinctive feature of the UK’s fiscal pivot is the emphasis on reducing the burden of tax on work and business. This is sensible. …the bigger problem for Liz Truss’s government is the Bank of England. It seems that the governor, Andrew Bailey, did not get the memo. Our central bank has been behind the curve since inflation first started to rise sharply in 2021. …The Bank of England effectively lost control of the UK bond market last Thursday when it raised interest rates by 50 basis points, instead of the 75bp that the US Federal Reserve and the European Central Bank raised by. Its timidity is now having an impact on both the gilt market and sterling. That is the essential context for the market reaction to the mini-Budget. Once you lose market confidence, it is doubly hard to win it back. …a more muscular stance from the BoE to underpin financial market confidence in the UK, even at the expense of some short-term pain.
He is right. The Bank of England should be focused on trying to unwind its mistaken monetary policy that produced rising prices. That’s the approach that will strengthen the currency. And Truss and Kwarteng should continue their efforts for better tax policy so the economy can grow faster. But better tax policy needs to be accompanied by much-need spending restraint, which is what the United Kingdom enjoyed not only during the Thatcher years, but also under Prime Ministers Cameron and May.
P.S. The IMF also interfered in British politics when it tried to sabotage Brexit.
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