The IMF Has Faith in Britain’s Fiscal Plans. I Wish I Did.

The International Monetary Fund (IMF) has upgraded its forecast for British economic growth this year from 1% to 1.3%, and the Treasury is delighted. After all, when your economic record is this uninspiring, even an extra three-tenths of a percentage point is worth celebrating.

But before Cabinet ministers get too carried away, the IMF has also downgraded its forecast for next year to just 1.2%. More worryingly, inflation is expected to average 3.3% this year and 2.8% next year, while unemployment is expected to remain high. Hardly the ingredients of an economic renaissance.

To be honest the IMF’s forecasting record is hardly great. In April 2023, it predicted that Britain would be the worst-performing major advanced economy, contracting by 0.3%. Six weeks later, it revised that forecast to growth of 0.4%. Britain eventually managed to grow by 0.1%, according to the initial ONS estimate.

The IMF is hardly alone in getting forecasts wrong. Economies are extraordinarily difficult to predict, especially when confronted with geopolitical shocks, volatile energy prices or the latest post on Truth Social.

Today’s upgrade is a good example. Much of it reflects stronger economic activity during the first half of 2026, which has already happened. Incorporating better historical data into an annual forecast tells us precious little about Britain’s future economic prospects.

Its latest assessment of the UK makes some extraordinary assumptions. Around three-quarters of the planned fiscal adjustment over the coming years is expected to come from higher taxation, with only a quarter from lower primary expenditure.

Britain’s tax burden is heading towards historic highs. Businesses are struggling with higher employment costs, expensive energy and weak domestic demand. Investment remains disappointing, productivity growth is anaemic and the incentives to work, save and invest have been steadily eroded.

I simply do not believe that a fiscal consolidation delivered overwhelmingly through higher taxation, without addressing profligate spending, will produce anything resembling the economic growth required. I may be wrong, but the Government’s record hardly inspires confidence.

Only yesterday the Institute for Fiscal Studies identified plausible additional departmental spending pressures of £35bn by 2030–31. Meanwhile, the Government’s existing plans depend on public-sector productivity improvements that would represent a remarkable departure from historical performance. Hopefully, AI will be allowed to help there.

To be fair, the IMF itself acknowledges that Britain’s fiscal strategy relies on ambitious efficiency savings and uncertain revenue projections.

In my recent UnHerd essay, I argued that politicians of every political colour face a fundamental problem when it comes to serious economic reform. The costs are immediate, politically painful and highly visible. The benefits, whether through improved productivity, stronger investment or more sustainable public finances, often take years or even decades to materialise, by which time the politicians responsible are probably enjoying retirement.

Why endure the electoral punishment today when somebody else might collect the economic rewards in 2040?

Economists have understood this problem of time inconsistency for decades, and British politicians have turned it into something of an art form.

It also explains why the IMF’s apparent confidence in fiscal consolidation strikes me as optimistic. Britain plainly needs to reduce borrowing, but does anyone seriously believe the Government has the political appetite to confront the spending commitments driving it?

We have a welfare system whose costs continue to rise, a public sector struggling to improve productivity and a national debt approaching £3 trillion. Yet the political debate still revolves around where the Chancellor might find another few tens of billions of pounds in taxation.

There is another problem with the IMF’s assumptions. Higher gilt yields are already tightening financial conditions, pushing up mortgage rates and making business investment more expensive. Further tax increases risk making matters worse.

If growth disappoints, tax revenues weaken and welfare spending rises. The fiscal arithmetic deteriorates, prompting demands for yet more taxation. Britain risks becoming trapped in precisely the low-growth, high-tax equilibrium from which it desperately needs to escape.

The IMF’s central forecast assumes that the necessary fiscal adjustment can be delivered without derailing growth. Perhaps it can, but how that adjustment is achieved matters enormously. Cutting welfare spending and improving incentives are very different from repeatedly increasing the tax burden. After decades of missed fiscal targets, abandoned spending promises and anaemic growth, I am less interested in what politicians promise than in what they actually deliver.

John Healey’s Budget on 28 October will tell us rather more about Britain’s economic prospects than today’s IMF forecast.