Phillip Inman 

Reeves’s £40bn tax rises will boost growth ‘sustainably’, says IMF

Rare intervention comes as Resolution Foundation says UK will remain ‘stagnation nation’ despite push to invest
  
  

The chancellor, Rachel Reeves
The IMF backs Rachel Reeves’s increase in investment and extra spending to ease the financial pressure on public services and boost growth. Photograph: Parliament Live

The International Monetary Fund has welcomed the measures announced by Rachel Reeves in her first budget, saying her £40bn of tax rises would boost growth “sustainably”.

In a rare intervention, the Washington-based IMF backed her increase in investment and extra spending to ease the financial pressure on public services and boost growth.

A spokesperson for the fund said new budget rules showed the government was committed to bringing down the UK’s debts over the longer term.

“We support the envisaged reduction in the deficit over the medium term, including by sustainably raising revenue,” they said, adding that the IMF approved of the government’s “focus on boosting growth through a needed increase in public investment while addressing urgent pressures on public services”.

Meanwhile, a leading UK thinktank has warned that despite Reeves’s push to invest, the budget would not end Britain’s record as “stagnation nation”.

The Resolution Foundation’s assessment of Labour’s first budget in almost 15 years said the chancellor had made a “decisive shift from the planned cuts set out by the last government, with better-funded public services and greater public investment coming from higher taxes and more borrowing”.

It said the rise in public investment, reversing planned cuts set out by the previous Tory administration, meant spending on public infrastructure would be maintained at about 2.6% of annual national income in each of the next five years. “This would be the highest five-year average in the UK since 1980-81, and bring the country close to the OECD average,” the thinktank said.

However, it warned that Labour’s spending spree to inject £70bn a year into the economy from increases in day-to-day and investment spending had “not yet delivered a decisive shift away from Britain’s record as a stagnation nation”.

The foundation’s verdict came after the Office for Budget Responsibility (OBR), the government’s independent forecaster, concluded that while the budget would probably improve public services and give public investment a boost, it would do little to lift economic growth over the next five years.

In a blow to Reeves, who had claimed before the budget that her measures would give the economy a boost, the OBR said a hefty rise in business taxes would limit the economy’s expansion to 1.5% in the final year of the parliament, down from 2% next year. Reeves said in her speech to parliament that the OBR had agreed that her plans would improve the UK’s growth prospects by 1.5% over the longer term.

The Resolution Foundation said a generous outcome for the NHS in the budget left many other Whitehall departments making difficult decisions over the next five years.

The health service will receive 40% of the £35bn increase to day-to-day public service spending between 2023-24 and 2025-26. As a result, the 2025-26 health budget would account for 42% of all departmental spending, up from 31% in 2007-08, it said.

Between 2025-26 and 2029-30 spending will increase by 1.3% on average across all Whitehall departments. Once the extra spending for health, schools and defence was ringfenced, the budget “implies £10.8bn of real per person cuts to unprotected departments, sending their funding back to 2015-16 levels”, the report said.

Tax and benefit changes outlined in the budget would “fall on everyone’s shoulders” once the combined impact of welfare cuts, an increase in employer national insurance rises and tax rises on consumer goods are felt evenly across the income distribution.

“The poorest half of households face a 0.8% reduction in their annual income on average, while the richest half face a 0.6% decrease,” the report said.

“However, increases to capital gains and inheritance taxes (not included in the modelling of day-to-day tax and benefits) are more progressive, so wealthy households will face the largest cash impact overall.”

Mike Brewer, the thinktank’s interim chief executive, said: “Rachel Reeves’s first ever budget was never going to be a crowd-pleaser, given the profound and often conflicting challenges she faced, from failing public services to perilous public finances, weak growth and stagnating living standards.

“With Britain finally turning the page on its longstanding failure to invest thanks to a £100bn boost to public capital spending, the hope is that this short-term pain will eventually turn into a long-term living standards gain. But if it doesn’t, future budgets won’t be any easier to deliver, especially if further tax rises are needed.”

 

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