Fiscal fisticuffs: the week the IMF attacked Britain’s tax cuts

The stinging rebuke from the IMF arrived at the worst moment for the UK government.

With sterling selling off and borrowing costs spiking on Tuesday, the fund issued a statement at around 8pm London time, chiding the UK for its plan to implement £45bn of debt-funded tax cuts and urging it to “re-evaluate” the package.

Using language reminiscent of missives directed at emerging markets in the grip of currency crises, the IMF said it was “closely monitoring recent economic developments in the UK” and was “engaged with the authorities”. Chief among the fund’s objections was that the “untargeted” fiscal package risked working “at cross purposes” to a Bank of England trying to stamp out soaring inflation.

Coming almost five days after Kwasi Kwarteng, UK chancellor, delivered his mini budget, the timing of the IMF statement raised eyebrows. It was sent out in response to media requests, rather than as a planned statement from the fund, raising speculation it might not have been fully vetted.

In fact, senior managers at the IMF, including managing director Kristalina Georgieva, were consulted on and ultimately approved its release, according to a person familiar with the matter. While the UK knew the fund was critical of the tax-cutting package, it was not given an advanced copy of the statement, said another person briefed on the events. The IMF declined to comment.

One former IMF official said he almost “fell out” of his chair after reading the statement. In just 130 words, the fund had sparked a global debate about its role as surveyor and commentator on global financial risks and its status as a lender of last resort.

“If you have a mandate for global financial and economic stability, you have to have a view,” the person said. “The question is how much of that do you convey?”

The unusually sharp criticism directed at a G7 country also raised questions about whether the IMF had overstepped its remit by commenting on domestic policy outside of a normally scheduled review, an update to its global economic outlook, or bailout talks.

We are dealing with a level of fragility that turns things that possibly would not have been shocking into shocks.

For the opposition UK Labour party in the middle of its annual party conference, the statement was a gift. In addition to fuelling a sense of crisis engulfing the British government, the IMF’s criticism of tax cuts that would “benefit high-income earners” and “likely increase inequality” chimed perfectly with Labour’s own attacks on Kwarteng’s fiscal plan.

The IMF also paved the way for a chorus of international censure, especially from the US. Later on Tuesday, Janet Yellen, US Treasury secretary, stopped short of condemning the tax cuts but echoed the fund’s language by saying Washington was “monitoring developments very closely”.

Yellen also noted that, like the US, the UK had a “significant inflation” problem and a central bank focused on trying to stem spiking prices.

By Thursday, the Biden administration had sharpened its attacks. “Business people want to see world leaders taking inflation very seriously,” said Gina Raimondo, US commerce secretary. “And it’s hard to see that out of this new [UK] government.”

But two people familiar with the matter said the US did not push the IMF to intervene. Finance ministers in France, Germany and Spain have also all criticised the fiscal package.

Regardless of the timing and tone of the statement, remaining silent was not an option, according to people familiar with the fund’s approach. The UK’s fiscal policy was so directly at odds with the advice the IMF had repeatedly given: that countries should refrain from “large and untargeted fiscal packages” at a time when central banks were trying to stamp out inflation.

Adding to a sense of urgency at the fund was the scale of the financial turmoil in the UK, and the possibility it could soon spread to other major markets.

“This is a time when everywhere monetary policy has to fight inflation and fiscal policy needs to help,” said one IMF insider. “But they are doing exactly the opposite and the central bank now has to print money to buy debt,” they added, referring to the Bank of England’s emergency £65bn intervention in the gilt market to prevent a pensions meltdown. “It’s the worst thing you could imagine.”

Larry Summers, the former US Treasury secretary who had criticised the IMF for not weighing in earlier, said the statement had “underscored how aberrant the behaviour” of the UK’s government had been.

“When there’s a crisis situation or policies that are manifestly irresponsible, it’s kind of natural for the IMF to take some kind of note,” he told the Financial Times after the fund’s intervention. “I don’t think the IMF should distinguish between its rich country shareholders and its emerging market shareholders.” 

Some economists said the economic instability in the UK would have triggered alarm even in tranquil times, but that the fraught global backdrop had served to magnify Britain’s problems.

“We are dealing with a level of fragility that turns things that possibly would not have been shocking into shocks,” Sarah Bloom Raskin, former deputy Treasury secretary in the Obama administration, said in an interview.

Bloom Raskin, who also served as a Federal Reserve governor, added: “When self-imposed wounds of the sort we see in the UK occur, in the midst of non-neutral and active central bank policymaking, the cascading effects on financial stability may be all the more unpredictable and unprecedented.”

However the fund has also come under fire for being overzealous in its rebuke of the UK and its unscheduled statement has generated criticism from former officials, Tory MPs in the UK and Republican lawmakers. One prominent British financial commentator called for a boycott of the “outrageously arrogant” institution, arguing it was a “faddish, hypocritical body” that had become “explicitly aligned with the Joe Biden left”.

One former IMF official said: “The fund has real problems coming up with so many developing countries, so why go and mess around with one country that, no matter what it does, will be in reasonably good shape for the next year or two?”

“I certainly don’t recall any uninvited, unwarranted and off-the-cuff comment like that on anybody’s economic proposal,” they added.

Meanwhile, Republican lawmakers demanded to know why the fund had not commented on what they see as the Biden administration’s fiscal irresponsibility.

Although the recently-passed package of clean energy and healthcare measures was offset with tax increases, last year’s $1.9tn Covid-19 stimulus was unfunded while a student loan forgiveness programme was this week estimated to cost $400bn. Yet the IMF has largely backed Biden’s fiscal policies, touting the positive impact of the last pandemic stimulus.

“It is puzzling that the IMF felt it necessary to opine on a G20 nation’s domestic policy, and to only now oppose a ‘large and untargeted fiscal package’,” said Bill Hagerty, the senator from Tennessee. “Where were the IMF warnings when the Biden Administration pushed through trillions in fiscal stimulus as our economy was overheating?”

Additional reporting by Chris Giles in London and Kiran Stacey in Washington