Liz Truss SCREENGRAB September 25 01
UK prime minister defends tax cuts as pound plummets
03:19 - Source: CNN
London CNN Business  — 

One of the world’s leading multilateral financial institutions has joined a chorus of criticism of huge tax cuts announced by the UK government last week that sent the pound plunging to a record low.

In a rare and stinging rebuke for such a large developed economy, the International Monetary Fund warned that the tax cuts — the biggest in Britain since the early 1970s — would likely increase inflation and 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.

The collapse in the pound since Friday has been accompanied by an eye-watering surge in UK borrowing costs, with yields on 5-year government bonds now topping those of much more heavily-indebted European economies such as Italy and Greece.

Financial markets are now expecting the Bank of England to have to raise rates to near 6% by next spring, from 2.25% at present, to shore up the currency and contain the inflationary pressures unleashed by the huge fiscal giveaway. The central bank’s chief economist on Tuesday promised “significant” rate action at its next meeting in November.

The Bank of England on Wednesday announced an emergency intervention in the government bond market, pointing to recent “dysfunction.” It said it would buy long-dated UK government bonds on “whatever scale is necessary” to “restore orderly market conditions.”

The government of Liz Truss, who succeeded Boris Johnson as prime minister only three weeks ago, said Friday that it would cut taxes by £45 billion ($48 billion) in a bid to get the UK economy moving again. The package includes scrapping the highest rate of income tax for top earners and a big increase in government borrowing to slash energy prices for millions of households and businesses this winter.

But many leading economists have described the unorthodox measures as a reckless gamble, and have warned that they will force the Bank of England to slam on the brakes even harder as it tries to tame inflation that is already running near 40-year highs at almost 10%.