The International Monetary Fund (IMF) has shown support for UK Chancellor Rachel Reeves’ new Budget, which includes a £40 billion tax increase primarily targeting businesses and high-income earners. While the IMF acknowledged the potential for economic challenges, it commended Reeves for her “sustainable” approach to reducing the national deficit.

Historic High in UK Tax Burden

The Budget marks a significant increase in the UK tax burden, reaching its highest level on record. Reeves’ tax strategy aims to boost public services, though she notes that further adjustments may be needed in future years. Reeves described this as a “once in a parliament Budget” but refrained from ruling out potential tax changes in the years ahead.

Mixed Reactions from Economic Leaders

While the IMF backed the Budget’s aim to curb the deficit, some leaders in the economic sphere remain cautious. Conservative shadow chancellor Jeremy Hunt criticized the tax rise as a blow to the UK’s competitiveness. Richard Hughes, chair of the Office for Budget Responsibility (OBR), pointed out that while increased government spending may give growth a short-term boost, the long-term growth rate is expected to level out at around 1.5%.

Hughes also noted that additional government spending could crowd out private investment, slowing growth over time. Although the OBR did not endorse Reeves' claims of finding a £22 billion “fiscal black hole,” it acknowledged significant pressures on the country’s finances that could lead to further adjustments down the line.

Impact on Businesses and Living Standards

One of the significant changes in the Budget is the planned £25 billion increase in national insurance contributions from employers. This change could impact workers by slowing wage growth, potentially leading to tighter household budgets. Think tanks like the Resolution Foundation have noted that while the Budget will provide better funding for public services, the economic outlook for growth and living standards remains subdued.

Challenges Ahead for the UK Economy

Reeves’ approach aligns with her commitment to responsible spending. However, the Budget’s slim £10 billion cushion against borrowing targets means there’s little room for error. Paul Johnson of the Institute for Fiscal Studies commented that while public service funding is strong in the short term, the country may face further tax increases if economic growth does not improve in the coming years.

Source: (FT.com)