IMF hails UK as only G7 member with serious debt-cut plan

Budget due within two weeks to test Healey’s limited room

The International Monetary Fund has identified the United Kingdom as the only G7 country with a serious plan to reduce its annual borrowing. Top IMF officials praised the UK’s plans on three occasions in the past 24 hours at the fund’s annual meeting in Bangkok, bucking the trend of the rest of the G7 group of countries, which includes Canada, France, Germany, Italy, Japan and the US.

Managing director Kristalina Georgieva said the UK has taken decisive action on debt and deficit. “The UK is actually one country where action to reduce debt and deficit has been taken decisively and we see the UK in that sense enjoying a bit of a better growth prospect,” she said. Her comments followed those of the IMF’s chief economist, Silvana Tenreyro, who told BBC economics editor Faisal Islam that UK borrowing reductions “stand out.”

“Get your fiscal health in order” has been a key message at the meeting, where the IMF is doing its job as a watchdog on the debts of the world’s biggest economies, looking for and warning about financial vulnerabilities. Islam reported that the finance ministers of former crisis countries are boasting about how little their borrowing costs have gone up compared with the world’s biggest economies, such as the US.

The IMF’s twice-yearly assessment of global economies showed only the UK among the G7 having a serious plan for consolidation of its annual borrowing over the next few years, worth nearly 4% of the size of the economy. The US, Germany and Japan are increasing borrowing. Canada and Italy are keeping borrowing at the same level. According to Islam’s analysis, the UK appears to be the IMF’s model pupil, at the top of the G7 table for reducing deficits.

The IMF’s view of the UK marks a notable shift for a country that, for the past half decade, has been on the bond market’s “naughty step,” often carrying the highest borrowing rates among the G7 since the Liz Truss mini budget, as political and economic crises afflicted different governments.

The praise is good news for the chancellor and the Treasury, but it also points to the sort of Budget the country will get in a fortnight’s time, Islam wrote. To keep the UK’s plans to reduce debt on track, Chancellor John Healey is likely to have limited room for extra spending, and he will want to marry this with limited tax rises.

Islam’s analysis also points to a possible modest decrease in the margin for error around meeting debt rules — the so-called headroom — tied to providing a cushion against an expected rise in energy prices due to the ongoing Middle East conflict and its impact on the cost of living overall, the so-called global inflation shock.

The constraints are likely to mean disappointment for many public services expecting cash injections to account for rising inflation, a concern suggested this week by the Institute for Fiscal Studies. They will also mean tough public sector pay discussions.

The Budget will not be “austerity,” Islam wrote, but the chancellor is likely to lean into the IMF framing of a government with austere plans relative to other advanced countries. The initial prize is to avoid the direct gaze of the bond markets, whose full glare is now on others such as France. The bigger prize could be lower relative borrowing costs for the government and households.

Ultimately, forecasts mean nothing without the underpinning of solid plans, Islam wrote, and those plans will be here for everyone to judge soon enough.