‘Tax cuts will increase inequality,’ IMF tells the UK government

The United Kingdom is yet to live past the recent tax cuts announced by the Liz Truss government. With each passing day, the British pound falls to a new low, and there are fears that it could reach parity with the US dollar. 

Reacting to the situation in the UK, the International Monetary Fund (IMF) on Wednesday issued a warning against the tax cuts, adding that the decision could lead to inequality. 

“We understand that the sizable fiscal package announced aims at helping families and businesses deal with the energy shock and at boosting growth via tax cuts and supply measures,” an IMF spokesperson said.

“However, given elevated inflation pressures in many countries, including the UK, we do not recommend large and untargeted fiscal packages at this juncture, as it is important that fiscal policy does not work at cross purposes to monetary policy,” the spokesperson added.   

An unusual criticism

The former deputy governor of the Bank of England, Charlie Bean, believes the IMF advice was an embarrassment to the UK government. He told CNN that the government’s decisions were “really stupid.”

“It’s unusual for the IMF to do that, particularly for a G7 economy, and for them to do it so swiftly,” he said, adding, “they might do these sorts of things for an emerging market country that has been on the edge for a while.”

US treasury secretary Larry Summers was on the same page with Charlie Bean. He told the BBC that the kind of warning Britain received was meant for emerging markets with new governments. 

“I can’t in all honesty remember a time when a set of policy announcements from a G7 country elicited so negative a response both from markets and from economic experts,” he said.

He added that the continuous fall in the UK’s currency indicates “a sign that there has been a major loss of market credibility and market confidence.”

Meanwhile, Lord Frost, a close ally of Prime Minister Liz Truss, condemned the IMF statement, affirming that the only solution to the high cost of living crisis is the reduction of taxes.

“The IMF has consistently advocated highly conventional economic policies. It is following this approach that has produced years of slow growth and weak productivity,” Lord Frost told the Daily Telegraph.

“The only way forward for Britain is lower taxes, spending restraint, and significant economic reform,” he added. 

Bank of England steps in to ‘restore orderliness’

Although the Bank of England was not responsible for the woes facing the British pound, it has begun steps to stabilize the currency. The BoE said it would purchase long-dated UK bonds beginning from today (Wednesday).

“The Bank will carry out temporary purchases of long-dated UK government bonds from 28 September. The purpose of these purchases will be to restore orderly market conditions. The purchases will be carried out on whatever scale is necessary to effect this outcome. The operation will be fully indemnified by HM Treasury,” the Bank said in a statement on Wednesday.

However, some financial experts believe that the decision by the BoE was not a guarantee that everything was well, as it was only a temporary measure to save the dying pound and the dwindling economy.