Allies of Liz Truss and Kwasi Kwarteng have hit back at the IMF’s biting attack on last week’s borrowing and tax cut plans, with Conservative MP Sir John Redwood saying the fund’s verdict reflected “the errors of the past”.
After several days of financial turmoil with sterling falling and rising costs for government and mortgage holders, the IMF took the unusual step on Tuesday evening of criticising the UK’s economic policy.
“Given elevated inflation pressures in many countries, including the UK, we do not recommend large and untargeted fiscal packages at this juncture,” the IMF said. “It is important that fiscal policy does not work at cross purposes to monetary policy.”
Ministers were not speaking publicly on Wednesday morning, but, on the BBC’s Today programme, former minister Redwood said the IMF should not have criticised the UK.
“[The fund] didn’t foresee the big inflation which they triggered, they didn’t have sensible advice in good time to see off inflation, and now late in the day when the inflation is very visible for all to see, they’re suggesting taking measures to tackle it when the world has moved on,” Redwood said.
He also hinted that the government’s response to concerns about unsustainable public finances would be a new programme of austerity and spending cuts to balance lower tax revenues.
“We haven’t yet seen the whole policy. We need to see what the overall budgets look like, looking at the spending side as well as the revenue side,” Redwood said.
Lord David Frost, the UK’s former Brexit negotiator, added: “The only way forward for Britain is lower taxes, spending restraint, and significant economic reform.”
But Sir Keir Starmer, the Labour leader, described the fund’s criticism as “very serious”. Accusing the prime minister and chancellor of making a “self-inflicted” mess of the economy, Starmer said Kwarteng should bring forward a planned statement on how he would repair the public finances from November.
“They’ve got to review the plans they put out on Friday. They’ve got to do it urgently, in my view,” Starmer said.
There is no sign that the chancellor is willing to change course on tax cuts aimed at boosting economic growth, although financial markets kept up the pressure overnight.
Sterling was down 0.4 per cent against the US dollar at $1.069, having stabilised since large falls on Friday and Monday. But a sharp rise in government borrowing costs has now fed through to the mortgage markets.
Lenders have had to pull fixed-rate mortgage deals while they reprice them at higher interest rates, causing pain for those buying property or coming to the end of fixed-rate deals. Futures markets expect the Bank of England to raise interest rates over 6 per cent by next summer.
The cost of government borrowing over 2 years fell to 4.5 per cent on Wednesday morning, down from more than 4.7 per cent the previous day but still far above the level of 3.5 per cent a week ago. Long-term government borrowing costs at 10 years and 30 years have also risen by more than a percentage point over the past week, in moves not seen for decades.
Even supporters of Truss have become worried by the rise in borrowing costs. Julian Jessop, an independent economist who has been advising the new prime minister referred to the rise on Twitter, saying “even I cannot put a positive spin on this”.