IMF criticizes Liz Truss for UK tax cuts and plans to increase borrowing

Just weeks after taking on the role, new Prime Minister Liz Truss is starting to implement her flagship spending plan designed to boost economic growth through a series of tax cuts and ambitious borrowing, set against a backdrop of rising cost of living, high energy pricesand widespread recession fears.

Truss has insisted the new plan will usher in a “decade of dynamism” for the country. But so far, between a mounting currency crisis and a $500 billion selloff in UK stock and bond marketsthe so-called “Trussnomics” model is backfiring, and even the International Monetary Fund is getting in on the criticism.

“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 in an unusually outspoken statement on Tuesday.

It is a familiar circumstance to another currency and financial crisis that hit the UK in 1976, when the pound hit a record-low valuation after years of increased government spending under then-finance minister Anthony Barber’s “spend for growth” plan. Barber’s policies led to several years of growth in the UK, but ultimately fueled annual inflation to 27% and brought on a currency collapse.

That financial crisis forced the UK to apply for its first and so far only loan from the IMF, which provided a bailout worth nearly $4 billion on the condition that the UK government significantly walks back its spending practices.

It sounds like the IMF is worried about a repeat.

What is Trussnomics?

Last week, Truss’ newly appointed Finance Minister Kwasi Kwarteng announced an integral component to the new Prime Minister’s economic plan: scrapping the tax rate for top income levels in a tax cut package worth £45 billion ($48 billion) over the next five years.

To account for the tax cuts, and betting on economic growth in the near future, the UK government is also planning on bumping up its borrowing rate significantly to around £100 billion a year, according to recent research by the Institute for Fiscal Studies (IFS), a think tank. Forecasts from March predicted that government borrowing in the UK would not rise above £50 billion a year, and dip below £40 billion by the mid-2020s, according to the IFS.

While acknowledging that the tax cuts and higher rates of government spending and borrowing could help households and businesses cope with higher costs, the IMF warned that Truss’s package could be at “cross purposes” with the Bank of England’s monetary policy designed to bring down soaring inflation in the country, and urged Truss’s administration to reconsider the package.

“The November 23 budget will present an early opportunity for the UK government to consider ways to provide support that is more targeted and re-evaluate the tax measures,” the IMF said.

The IMF also warned that the new policies, especially the tax cuts, would “likely increase inequality” in the country and benefit high-income earners.

Nearly half of the financial gains from the package could be funneled into Britain’s wealthiest 5%, according to an appreciate published last weekend by the anti-poverty group the Resolution Foundation, while only 12% of benefits will go to the poorest half of UK citizens.

IMF warnings

It’s never a good sign when a country, much less a developed country with a mature economy, has its economic policies called into question by the IMF.

The IMF acts as the world’s de facto lender of last resort. The agency works to promote international monetary cooperation, and helps emerging economies build their financial reserves and stabilize currencies.

And with everyone from billionaire investors Ray Dalio to former US Treasury Secretary Larry Summers criticizing the UK for behaving like an emerging market economy, experts are warning that the country’s current situation is eerily similar to the last time it required an IMF bailout in 1976.

Over the weekend, famed economist Nouriel Roubini—also known as Dr. Doom after his prescience in predicting the 2008 market crash—wrote good Twitter that the UK economy was reverting “back to the 1970s” and could fall into a stagflationary trap forcing the country to ask for an IMF bailout.

Earlier this month, Peter Chatwell, head of global macro strategies trading at Mizuho Securities, told Bloomberg that the current economic situation in the UK reminded him of the 1970sand that he was “thinking about the possibility of an IMF bailout.”

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