Market News

BY Tim Wallace

Rachel Reeves must raise taxes on working people, scrap the pension triple lock or start charging for the NHS, the International Monetary Fund (IMF) has warned.

The global watchdog said the Chancellor must take unpopular decisions to ease mounting pressures from high debt, rising borrowing costs and weak growth, combined with an ageing population and a ballooning pensions bill.

This combination of problems means Ms Reeves and her successors face a stark choice.

Either they must increase taxes on working households, abandon core parts of Britain’s welfare state such as the triple lock, or start charging people for the health service, which is free to all at the point of use.

“Unless the authorities revisit their commitment not to increase taxes on ‘working people’, further spending prioritisation will be required to align better the scope of public services with available resources,” the IMF said.

“The triple lock could be replaced with a policy of indexing the state pension to the cost of living.

“Access to public services could also depend more on an individual’s capacity to pay, with charges levied on higher-income users, such as co-payments for health services, while shielding the vulnerable.

“There may also be scope to expand means testing of benefits.”

In its latest economic summary, dated July 1 but only published on Friday, the IMF praised the Government for its attempted welfare reforms.

But since the report was written, those reforms have been watered down by Sir Keir Starmer as he faced the prospect of defeat in Parliament at the hands of his own backbench MPs.

The climbdown has cost the Government billions of pounds in planned savings, with the original reforms expected to bank £5bn by slowing the pace of spending on health and disability benefits.

The IMF said reforms of this kind were critical to putting the finances on a more sustainable trajectory.

“The authorities’ fiscal plans [as set out in March] strike a good balance between supporting growth and safeguarding fiscal sustainability,” the watchdog said.

“It will be important to stay the course and deliver the planned deficit reduction over the next five years.”

Stagflation threat

Bringing the finances under control “will require strictly adhering to the announced spending envelope”, it added, claiming that Ms Reeves must not shy away from “difficult choices”.

“In an uncertain global environment and with limited fiscal headroom, fiscal rules could easily be breached if growth disappoints or interest rate shocks materialise,” the IMF said.

At the same time the Government faces risks in financing the £2.9tn national debt, as “structural changes in the gilt market have rendered it more vulnerable”.

Pension funds are buying less long-term debt, while “more speculative” hedge funds are financing more of Britain’s borrowing.

It means “fiscal prudence remains of utmost importance”, the IMF said, recommending “the authorities should remain in close contact with market makers” to assess demand for different types of bonds.

Political pressure may also lead to calls for increased departmental spending.

Seeing through the planning reforms to boost housebuilding may also prove politically difficult, the IMF said, but the Government must succeed if it is to strengthen the economy.

The watchdog expects the economy to grow by 1.2pc this year and 1.4pc in 2026, as global tariffs remain a threat despite recent trade deals with the US, EU and India.

The IMF also warned of the risk of “stagflation”, where prices keep rising while the economy struggles to grow. Such a situation that would make life even tougher for the Chancellor and the Bank of England, which hopes to cut interest rates in the months to come.

Jobs blow

The jobs market has also been hit as the IMF warned business confidence and hiring plans had suffered after the Chancellor’s National Insurance raid.

Even more tax rises may be needed to fill holes in the finances if the economy weakens further, it added.

“Potential tax measures include reforming property tax and removing VAT exemptions,” the IMF said. That could include higher taxes on products and services which do not attract the full 20pc VAT rate, including food, children’s clothes, and household energy bills.

There are signs the economy is struggling. Official data published on Friday showed retail sales in June were 0.9pc higher than May, less than the 1.2pc economists had anticipated.

The IMF also warned that reducing immigration would harm the economy if British workers cannot take up the slack.

“Over the past two decades, the UK has succeeded in maintaining strong labour supply growth, through immigration and impressive gains in labour force participation,” it said.

“But an ageing population and the policy choice to moderate the levels of inward migration mean that the focus must shift toward upskilling the existing population.”

Ms Reeves said the IMF’s report showed support for her plans.

“Today’s IMF report confirms that the choices we’ve taken have ensured Britain’s economic recovery is under way, and that our plans will tackle the deep-rooted economic challenges that we inherited in the face of global headwinds,” the Chancellor said.

“Our fiscal rules allow us to confront those challenges by investing in Britain’s renewal.

“We’re committing billions of pounds into improving transport connections, providing record funding for affordable homes, as well as backing major projects like Sizewell C to drive economic growth.

“There’s more to do, and that’s why we’re slashing unnecessary red tape and unblocking investment to let British businesses thrive and put more money in working people’s pockets.”

Mel Stride, the shadow chancellor, said the IMF’s verdict “is yet more confirmation that Labour’s mismanagement means yet more tax rises are coming in the autumn”.

“The Chancellor has already maxed out the credit card, her only options are to cut spending or raise taxes,” he said.