The International Monetary Fund has warned Britain that it must maintain its deficit reduction plans as rising energy costs and debt servicing pressures threaten fiscal stability, just days before Finance Minister John Healey prepares his first annual budget.
IMF’s Outlook on UK Fiscal Policy
The IMF singled out Britain as the only major advanced economy with clear plans to reduce government borrowing, praising the government’s commitment to fiscal consolidation. However, new IMF Chief Economist Silvana Tenreyro cautioned that maintaining this trajectory would become more difficult as interest costs on national debt climb and pressure grows to increase spending on defense and energy subsidies.
“The UK has already started the (fiscal) consolidation path… It is on that trajectory, and the message for the UK is simply stay the course and continue on that trajectory,” Tenreyro said during a press conference at the IMF’s annual meeting in Bangkok.
Despite this praise, the UK’s government borrowing costs remain the highest among Group of Seven major economies, reaching their peak since 1998 last week amid a global bond market sell-off. The government aims to balance day-to-day spending with tax revenue by the 2029/30 financial year, though past administrations have struggled to meet similar targets.
Economic Challenges Ahead
The IMF projects Britain’s economy will grow 1.3% this year, an upward revision from previous forecasts, before slowing to 1.2% growth in 2027. However, the fund warned that higher energy prices and long-term interest rates will weigh on consumption and investment, potentially constraining growth.
Bank of England policymaker Megan Greene, who has advocated for higher interest rates since June, said the IMF’s forecasts reinforced her view that the current 3.75% policy rate is insufficient to combat inflation. Unlike the European Central Bank and US Federal Reserve, the BoE has not raised rates since February’s US-Iran tensions, despite inflation remaining above the 2% target for nearly five years.
Financial markets now assign a 90% probability to a BoE rate increase following its November meeting, with expectations of three additional hikes in 2027. The IMF forecasts inflation will average 3.3% in 2026 and 2.8% in 2027, aligning closely with projections for the eurozone and United States.
h2>Policy Implications and Market Reactions
The IMF emphasized that central banks globally must act swiftly to raise interest rates when public confidence in inflation targets weakens, and resist political pressure to tolerate persistently above-target inflation or excessive government borrowing.
Finance Minister Healey defended the government’s approach, arguing that the IMF’s revised growth projections demonstrated the British economy’s resilience despite geopolitical uncertainties in the Middle East and Ukraine. The Bank of England’s projections suggest the global energy price surge will push inflation to over 4% early next year, adding further pressure on monetary policy decisions.
