(May 18): The International Monetary Fund (IMF) urged the UK to stick to plans to reduce borrowing and warned of limited space for tax increases as investors brace for a challenge to Keir Starmer’s premiership that could signal changes in economic policy.
In its Article IV annual health check of the economy on Monday, the fund warned of the need to control the welfare bill amid a volatile global backdrop and high public debt. It praised the Treasury’s targeted response to the energy crisis and said measures to limit the impact on households should remain both means-tested and temporary.
The IMF upgraded its 2026 growth forecast for the UK to 1% from 0.8% previously. However, it said the economy could be hurt by “domestic uncertainty” and laid bare Britain’s fiscal limitations, in a warning to Labour leadership candidates jostling to position themselves for any race to replace the prime minister.
“Staying the course on deficit reduction will be important given market pressures and elevated implementation risks,” the IMF said.
Heavy losses for the ruling Labour Party in local elections earlier this month have pushed many of Starmer’s MPs into open mutiny against their prime minister, and almost 100 backbenchers called on him last week to set a timetable for his departure.
See also: Revolt against Starmer revives UK debate over undoing Brexit
Greater Manchester mayor Andy Burnham — who is seen as one of the front-runners — used interviews over the weekend to try to reassure markets that he will maintain fiscal discipline, after he had previously said that the UK was dangerously “in hock” to the bond markets, in comments last year he later said were misinterpreted.
UK government bonds dropped on Friday after Burnham took a major step toward being able to stand in any leadership race with the benchmark 10-year gilt yield climbing to the highest since 2008.
The IMF said the current Labour government is striking a “good balance” between spending and efforts to stabilise public debt. However, it also urged policy stability and warned of pressures from defence spending and the pensions triple lock.
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“In a more shock-prone world, there is a premium on policy predictability and on measures that strengthen confidence and resilience,” Luc Eyraud, IMF mission chief to the UK, told reporters in London.
The IMF said the UK is approaching limits on how much it can increase taxes without major reforms, after Labour’s first two budgets included steep hikes.
“The scale of rising spending pressures and limited tax space imply that a growing share of the adjustment will likely need to come from expenditure restraint in the longer term,” it said.
Chancellor of the Exchequer Rachel Reeves said the growth upgrade and IMF comments are “yet more proof that this Government has the right economic plan”.
“Putting our stability at risk when signs of progress are emerging would leave families and businesses worse off,” she said.
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