UK's mini-budget to 'likely increase inequality,' cautions IMF

ANKARA

The International Monetary Fund (IMF) warned the UK on the government's newly announced mini-budget, saying the nature of current fiscal measures will "likely increase inequality."

In an unusually outspoken statement on Tuesday, the IMF said it was "closely monitoring" developments after British Chancellor Kwasi Kwarteng on Friday unveiled a mini-budget in parliament comprised of a debt-financed package of £45 billion ($49 billion) in tax cuts -- the biggest round in 50 years.

The IMF urged the chancellor to "reevaluate the tax measures" in his fiscal statement, which Kwarteng told lawmakers would be "one of the most significant interventions the British state has ever made" that would "turn the vicious cycle of stagnation into a virtuous cycle of growth."

The British pound hit all-time low against the US dollar after Kwarteng's speech, falling as much as 4.7% to $1.035.

The mini-budget includes several tax cuts and the cancellation of a planned corporate tax rate hike to 25%.

As the Bank of England signaled it was ready to deliver further interest rates to back up the pound, the government has been trying to unveil fiscal measures to reach out to promised economic growth.

The bank last week raised its key interest rate by 50 basis points to 2.25%, its seventh consecutive rate hike, bringing borrowing costs to their highest level since 2008.

"We understand that the sizeable fiscal package announced aims at helping families and businesses deal with the energy shock and at boosting growth via tax cuts and supply measures," the IMF said in its statement.

"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 global body urged Chancellor Kwarteng to alter the measures with another medium-term debt-cutting package that he promised after the market response to the mini-budget.

It said the additional measures, due Nov. 23, would "present an early opportunity for the UK Government to consider ways to provide support that is more targeted and reevaluate the tax measures, especially those that benefit high income earners."

On the other hand, a Treasury spokeswoman said: "We have acted at speed to protect households and businesses through this winter and the next, following the unprecedented energy price rise caused by Putin’s illegal actions in Ukraine."

The government was "focused on growing the economy to raise living standards for everyone" with Kwarteng's upcoming statement on Nov. 23 to "set out further details on the government’s fiscal rules, including ensuring that debt falls as a share of GDP (gross domestic product) in the medium term," she said.