Britain's Conservative government warned against tax cuts by IMF economist

LONDON (AP) — The International Monetary Fund’s chief economist has advised the U.K. government to avoid further tax cuts amid expectations Prime Minister Rishi Sunak’s battered administration will do just that to win over voters in an election year.

Instead of reducing taxes, the government should ensure it is prepared to meet increasing demands for spending on the National Health Service, social care and education as Britain faces sluggish economic growth and the lingering effects of high inflation, Pierre-Olivier Gourinchas told reporters after the IMF released its latest outlook for the world economy.

U.K. Treasury chief Jeremy Hunt is widely expected to cut taxes in the coming months as part of an effort to boost support for his Conservative Party, which trails badly in most opinion polls. The next general election must be held by Jan. 28, 2025, and is expected to take place this year.

But Gourinchas said cutting taxes would be a mistake. Britain needs to make sure its finances are strong enough to accommodate increased spending demands without increasing debt as a proportion of economic output, he said.

“In that context, we would advise against further discretionary tax cuts as envisioned and discussed now,” Gourinchas said.

His comments came after the IMF downgraded its outlook for the U.K. economy, forecasting growth of 0.6% this year and 1.6% in 2025. In October, the IMF forecast that the U.K.’s gross domestic product would grow 2% in 2025.

Hunt is focusing on longer-term projections, noting that the IMF expects growth to strengthen over the next few years.

“It is too early to know whether further reductions in tax will be affordable in the budget, but we continue to believe that smart tax reductions can make a big difference in boosting growth,” he said.

Concerns about responsible fiscal policies are especially sensitive for Sunak and Hunt as they came to power after their predecessors were widely criticized for announcing millions of pounds in tax cuts without saying how they would be paid for.

Former Prime Minister Liz Truss was forced to resign after less than two months in office when concern about her policies sent the pound tumbling to an all-time low against the U.S. dollar and forced the Bank of England to intervene in bond markets to protect pension funds.