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IMF Backs Reeves’ £40bn Tax Rises for Sustainable Growth Boost

In an uncommon show of support, the International Monetary Fund (IMF) has openly backed the bold measures outlined in Chancellor Rachel Reeves’ inaugural budget. The Washington-based financial institution specifically lauded the £40 billion in tax increases, asserting that they will sustainably boost economic growth.

The IMF spokesperson praised the government’s commitment to reducing the deficit over the medium term, including through sustainably raising revenue. They also commended the focus on boosting growth via a necessary increase in public investment while addressing urgent pressures on public services.

Stagnation Nation Concerns Persist

However, the optimism was not universal. The Resolution Foundation, a prominent UK think tank, warned that despite the Chancellor’s investment push, the budget might not be sufficient to shed Britain’s unfortunate moniker as the “stagnation nation“.

In their assessment of Labour’s first budget in nearly 15 years, the foundation noted a decisive shift from the planned cuts set out by the previous government. The increased taxes and borrowing will fund better public services and greater public investment.

Highest Public Investment in Decades

The think tank highlighted that the rise in public investment, reversing planned Tory cuts, would maintain spending on public infrastructure at about 2.6% of annual national income over the next five years. This would mark the highest five-year average in the UK since 1980-81, bringing the country close to the OECD average.

OBR Dampens Growth Expectations

However, the Office for Budget Responsibility (OBR), the government’s independent forecaster, poured cold water on Reeves’ claims that her measures would significantly boost the economy. They concluded that while the budget would likely improve public services and investment, it would do little to lift economic growth over the next five years.

The OBR projected that 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. This contrasts with Reeves’ assertion in her parliamentary speech that the OBR agreed her plans would improve the UK’s growth prospects by 1.5% over the longer term.

NHS Wins Big, Other Departments Face Cuts

The Resolution Foundation noted that the NHS emerged as a big winner in the budget, receiving 40% of the £35bn increase to day-to-day public service spending between 2023-24 and 2025-26. Consequently, the 2025-26 health budget will account for 42% of all departmental spending, up from 31% in 2007-08.

However, this generosity towards health means many other Whitehall departments face difficult decisions in the coming years. Between 2025-26 and 2029-30, spending will increase by just 1.3% on average across all departments. Once extra spending for health, schools, and defense is ringfenced, unprotected departments are looking at £10.8bn of real per person cuts, sending their funding back to 2015-16 levels.

Tax and Benefit Changes Impact All

The think tank also highlighted that the tax and benefit changes outlined in the budget will “fall on everyone’s shoulders” once the combined impact of welfare cuts, employer national insurance rises, and tax hikes 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.

– Resolution Foundation report

However, the report noted that increases to capital gains and inheritance taxes, which were not included in the day-to-day tax and benefits modeling, are more progressive. This means wealthy households will face the largest cash impact overall.

Short-Term Pain for Long-Term Gain?

Mike Brewer, the Resolution Foundation’s interim chief executive, summed up the challenges facing Reeves in delivering this budget:

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.

– Mike Brewer, Resolution Foundation

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

As the UK navigates this critical juncture, all eyes will be on whether Chancellor Reeves’ bold tax and spend strategy can succeed where previous governments have faltered – in shaking off the specter of economic stagnation and restoring sustainable growth. Only time will tell if the IMF’s endorsement and the government’s ambitious investment agenda will be enough to steer the nation towards a brighter economic future.