UK warned over ballooning debt costs and slower growth ahead of Budget

The International Monetary Fund (IMF) has delivered a stark assessment of the UK's economic landscape, cautioning the new government about a formidable combination of slower growth and ballooning public debt. The warning comes as Chancellor John Healey prepares for his first Budget, setting a challenging tone for future fiscal policy.

Economic Growth Forecasts Trimmed

The IMF revised its UK growth forecast downwards, projecting the economy will expand by just 0.5% in 2024, a reduction from its previous estimate of 0.7%. The outlook for 2025 was also cut from 1.7% to 1.5%. This more pessimistic view, which lags behind forecasts from the Bank of England and the Office for Budget Responsibility, is primarily attributed to weaker-than-expected consumer spending. Persistent inflation and high interest rates continue to squeeze household budgets, dampening domestic demand.

A Mounting Public Debt Burden

A central concern for the IMF is the trajectory of the UK’s public finances. The report projects that public sector net debt will climb to 97% of gross domestic product (GDP) by 2029, a level not seen since the 1960s. Underscoring the severity of the fiscal strain, the Fund noted that government spending on debt interest has now surpassed the entire budget for education, limiting the scope for other public investments.

Fiscal Policy Under Scrutiny

In its policy recommendations, the IMF strongly advised against implementing unfunded tax cuts, arguing they would be “difficult to afford” and risk fueling inflation. Instead, the institution urged the government to prioritize fiscal consolidation to rebuild financial buffers. Specific suggestions included reforming capital gains and inheritance taxes, as well as broadening the application of Value Added Tax (VAT) and carbon taxes to stabilize the nation's finances.

Market and Monetary Outlook

The Fund’s analysis creates a challenging backdrop for UK markets, signaling limited room for fiscal stimulus. The pressure for fiscal tightening could impact corporate earnings and investor sentiment. On the monetary policy front, the IMF anticipates the Bank of England will proceed with caution, forecasting two interest rate cuts this year, which would bring the benchmark rate down from 5.25% to 4.75%. This difficult environment demands a credible, long-term fiscal strategy from the new government to ensure economic stability without stifling a fragile recovery.