IMF Warns That UK Government May Need To Increase Taxes

by Jason Gorringe, Tax-News.com, London

23 December 2004

In its concluding statement on the 2004 Article IV consultation with the United Kingdom, the International Monetary Fund (IMF) announced that the country's economic performance remains "impressive", but suggested that Chancellor Gordon Brown's growth estimates are over-optimistic.

In his recently delivered pre-Budget report, Mr Brown predicted 2005-06 economic growth of around 3.25%. However, the IMF suggested that levels of 2.5-2.75% are more likely.

The IMF statement also suggested that the Chancellor is in danger of breaking his 'golden rule' on borrowing, observing that:

"Considerable uncertainty about the course of revenues over the medium term has heightened the debate about whether current policies will return the fiscal accounts to a sustainable position consistent with the government's fiscal rules."

The IMF warned that either cuts in spending or tax increases will likely be necessary to balance the Chancellor's books and bridge what some observers are referring to as the 'budget black hole'.

"We would favor an approach that relies on spending restraint - both to reduce the current risks of running into limits on absorbative capacity and to allow more time to assess value for money," the Fund announced. However, it continued:

"If more reliance on revenue measures were desired, broadening the tax base would be preferable to raising tax rates, given potential adverse effects on supply."

The Article IV concluding statement went on to urge the continuing review of spending and revenue collection, announcing that:

"On revenues, we welcome the planned integration of Inland Revenue and Customs, which is critical for improving tax collection and using information better."

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