Chancellor Rachel Reeves faces the risk of breaking her fiscal rules due to unexpected economic shocks, the International Monetary Fund (IMF) has warned. The global financial body said the Government confronts "significant challenges" in delivering its economic agenda amid growing international uncertainty.
The IMF highlighted the UK's "limited" fiscal headroom, warning that public finances have little room for manoeuvre. The Washington-based organisation called on Reeves to consider tax changes or spending cuts to maintain financial stability.
Fiscal rules under pressure
In its annual report on the UK economy, the IMF cautioned that "fiscal rules could easily be breached if growth disappoints or interest rate shocks materialise". The warning comes as the Government operates in an "uncertain global environment" with constrained public finances.
The fund praised the Government's fiscal plans, saying they "strike a good balance between supporting growth and safeguarding fiscal sustainability". It added that the pro-growth agenda "covers the right areas to lift productivity".
Trade war creates volatility
However, the IMF warned that delivering the Government's agenda would require "overcoming significant challenges" amid fallout from US President Donald Trump's trade war. The fund said "shockwaves from trade policies and rapid geopolitical developments are affecting global growth and creating heightened levels of volatility in financial markets".
The organisation noted that "fiscal space is limited and constrained by an elevated interest burden and increasing demands on public resources, including defence and aging-related spending". These pressures further restrict the Government's ability to respond to economic shocks.
Chancellor defends strategy
Reeves said the 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". She insisted the Government's fiscal rules would allow it to "confront those challenges by investing in Britain's renewal".
The IMF also recommended reducing assessments of whether the Government meets its fiscal rules by the Office for Budget Responsibility (OBR) to once a year ahead of the autumn budget. This change could "reduce pressure for overly frequent changes to fiscal policy", the fund suggested.
(PA/London) Note: This article has been edited with the help of Artificial Intelligence.
