The International Monetary Fund warns the UK government against further tax cuts

The International Monetary Fund has advised the UK against further tax cuts, in its latest assessment of the global economy.

She said that maintaining public services and investment would mean higher spending than was reflected in the current government's plans.

The International Monetary Fund noted that the spending cuts set by the Treasury Department this year were unrealistic.

Treasury Secretary Jeremy Hunt said tax cuts could significantly help boost growth.

Hunt has hinted strongly at further tax cuts in his next budget in March.

The International Monetary Fund is an international organization with 190 member countries, including the United Kingdom. They work together to try to stabilize the global economy.

One of the Fund's functions is to advise its members on how to improve their economies.

The IMF's latest comments came as it cut its forecast for UK growth next year from 2% to 1.6%, partly due to a statistical finding of growth being revised higher during the pandemic years. This better performance leaves less room for growth to catch up in subsequent years.

UK growth last year and this year is expected to remain sluggish at less than 0.5% and 0.6% respectively, the second slowest rate among the major economies in the G7, after Germany.

The IMF also assumes that interest rate cuts by the Bank of England are lower than in financial markets, calculating that interest rates will remain at 5.25% in the first half of this year. The bank is then expected to reduce by half a percent during the second half of the year.

Treasury sources said the government was criticizing the IMF over its advice on tax cuts, which draws from the organisation's research for its annual in-depth health check of the UK economy.

It comes at a sensitive time ahead of the budget and general election as the chancellor hopes to draw a key dividing line with the opposition over a smaller state, with lower public spending and lower taxes. Treasury sources said the improvement in the UK's growth outlook arose due to targeted tax cuts for business investment by the Chancellor.

On Tuesday, Hunt received the first draft of public finance figures from the Office for Budget Responsibility (OBR) – the government's independent forecasting body – including an indication of the room for maneuver that could be used to cut taxes or increase spending.

The head of the Office of Budget Management, Richard Hughes, recently said that calling the government's post-election spending plans a “work of fantasy” was “generous” because “the government did not even bother to write” its plans for individual departments.

If the government sticks to its spending plans, lower interest rates and a stronger economy could increase the Chancellor's room to maneuver against self-imposed borrowing targets of up to £20bn a year.

Commenting on the IMF's advice, Hunt said: “The IMF expects growth to strengthen over the next few years, supported by our provision of the largest tax breaks on capital investment anywhere in the world, along with National Insurance reductions to improve work incentives.

“It is too early to know whether additional tax cuts will be affordable in the budget, but we still believe that smart tax cuts can make a big difference in boosting growth.”

But Labour's Darren Jones, the shadow chief secretary, said the IMF forecast was “further evidence of 14 years of Tory economic failure”.

“The Conservatives have left Britain with high debt, stagnant growth, high taxes and working people worse off,” he said.

The International Monetary Fund and the UK government have disagreed on previous forecasts. In October last year, the International Monetary Fund rejected government suggestions that its assessment of the UK at the time was too bleak.

But economic forecasters are not always right when it comes to predicting the future. The IMF has previously said that its forecasts for most advanced economies, such as the UK, were often within about 1.5 percentage points of what actually happened.

Elsewhere, the International Monetary Fund predicted that the global economy would be on a “soft landing” path with lower inflation and more resilient growth.

It now expects growth of 3.1% this year, instead of the 2.9% it forecast in October, due to US resilience and the strong performance of developing economies such as Mexico and India.

There was a notably big upgrade to its growth forecast for Russia, which is now expected to grow by 2.6% this year, ahead of a previous forecast of 1.1%. The expansion comes despite sanctions facing the country after its invasion of Ukraine, where high military spending is fueling growth.

China grew by 5.2% last year, and although it is not expected to do well this year, the International Monetary Fund's outlook for the country has become brighter since October. It now expects growth of 4.6%.

However, the International Monetary Fund has warned that much depends on the deeply troubled real estate sector and the extent of support it receives from the Chinese government.

The International Monetary Fund said that tensions in the Middle East represent another important cause for concern. She said recent attacks on commercial ships in the Red Sea and the ongoing war in Ukraine could harm global trade.

Amid these challenges, the International Monetary Fund urged the world's central banks to focus on stabilizing prices.

Over the past year, central banks have increased interest rates in an attempt to slow inflation, the pace at which prices rise.

The International Monetary Fund said it expects global inflation to decline from 6.8% last year to 5.8% this year, and that advanced economies will witness the largest declines.

In addition to raising interest rates, the organization said lower energy prices would help reduce inflation. Slowing wage growth, as companies find it easier to hire new employees, will also help mitigate price increases, she said.