The IMF warned Jeremy Hunt against UK tax cuts, pointing out a 30 billion funding gap.

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The IMF has warned of a nearly $30 billion gap in public finances, saying the UK government will have little room for new tax cuts and will struggle to rein in spending growth.

In its annual health check on the UK economy, the fund predicted the UK would miss its fiscal targets later in the decade due to higher health spending and public investment.

The IMF said governments should raise revenues and charge for a wide range of public services through measures including reform of value-added tax (VAT), capital gains tax and inheritance tax.

Governments face urgent service delivery and investment needs. [IMF] In the staff's view, this would be difficult to accommodate within the formal medium-term spending plan, the fund said in its annual Article IV report for the UK.

Definitely stabilizing debt in the medium term will require some difficult choices if it doesn't provide a significant boost to potential growth, he added.

The findings come at a sensitive time for Prime Minister Jeremy Hunt as he tries to find room to cut taxes further before the next general election.

The Washington-based IMF warned in January against new tax cuts due to Britain's constrained budget situation, but Hunt went ahead anyway and cut national insurance by a further 2p in March.

In a report on Tuesday, the fund said these national insurance cuts could help boost labor supply and were partly offset by other measures, such as ending non-resident tax eligibility.

But the Prime Minister said national insurance should not be lowered given the medium-term financial challenges facing the UK.

Against the backdrop of these challenges, and in line with general principles, staff said they would advise against further tax cuts unless they promote growth and are adequately offset by high-quality deficit reduction measures.

The bleak outlook will be a sobering read for Labor, which refuses to reverse national insurance cuts and is seeking to adopt a stringent departmental spending plan that the Resolution Foundation think tank calls a fiscal fiction.

The IMF report cast doubt on Britain's official forecast that the ministry's daily spending will increase by 1% a year in real terms over the next few years. It said this was not realistic because of the demand for public services and the important growth stimulus. investment needs [including for the green transition].

The fund said it would be more realistic to see departmental spending increase by 2% per year. But that level of spending would help raise the public debt-to-GDP ratio to 97% in 2028-29. This is well above the Office for Budget Responsibility's projection of 93%.

The report argued that the government should improve the basic budget balance, excluding interest payments, by an average of 1 percentage point of GDP from 2025 to 2026 (equivalent to less than 30 billion that year).

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Despite the harsh fiscal outlook, the fund found that the UK is now nearing a soft economic landing after experiencing a mild technological recession in 2023, and slightly raised its 2024 GDP growth forecast to 0.7% from 0.5%.

Hunt said the report confirmed the UK economy had turned around.

With the IMF upgrading our growth this year and predicting we will grow faster than any other large country in Europe over the next six years, it is time to shake off some of the unwarranted pessimism about our prospects, he said.

Inflation is expected to steadily return to the Bank of England's 2% target in early 2025. This would pave the way for a rate cut this year, the fund said, as it expected a 0.5-0.75% cut in 2024. It will be reduced by a percentage point in 2025.

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