The government of the United Kingdom decided to implement its strategy to combat inflation due to inflationary pressures. However, the International Monetary Fund, the world’s top financial organization, criticized the proposals unveiled by the UK government, which newly elected Prime Minister Liz Truss leads.
According to the IMF, the UK government’s proposed significant tax cuts will have more negative effects than positive ones. The group also stated that the changes would result in higher inflation and inequality across the nation. The tax cuts would be the largest since the 1970s if implemented.
“We understand that the sizable 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.
“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.”
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The weak pound value exacerbates the problem
The UK government is currently dealing with skyrocketing costs for goods and services and an unprecedented decrease in the pound’s value. To expand subsidies to consumers and energy corporations in the face of energy shortages, the government is also borrowing more money from foreign nations. The UK government took out loans from several nations, including Greece and Italy.
The UK government’s huge borrowing and expenditure have prompted the Central Bank of England to issue a warning about potential rate increases. However, sources claim that rates might rise by 6% next spring, a sharp increase from the present 2.25%. The increase would counteract the depreciation of the currency and the rising inflation.
The Bank of England also said it would take strict measures to “restore orderly market conditions” for the nation, highlighting the dysfunctional nature of the existing market circumstances.
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It is a reckless gamble
Liz Truss, who took over as prime minister from Boris Johnson, announced the tax cuts a few days ago. Along with the significant reductions, she has also slashed corporation taxes, which analysts believe is a risky bet on her behalf. Moreover, now that energy costs are rising, the UK government will have to depend heavily on borrowing to pay for its subsidy program for people and businesses.
The UK Treasury also stated that it has future intentions to aid in the condition’s improvement. The treasury authorities stated that their plans would be revealed on November 23.
However, the IMF wasted little time in criticizing the UK government and issuing a warning that its present policies might aggravate the nation’s record-high inflation and increasing inequality. The IMF strongly advises the government to utilize the November budget “to consider ways to provide the support that is more targeted and reevaluate the tax measures, especially those that benefit high-income earners.”
The UK government defended its choice after facing criticism for its statement a few days prior. Truss asserts that their choice was “incentivizing businesses to invest, and we’re also helping ordinary people with their taxes.”
“I don’t really accept the premise of the question at all. The UK has one of the lowest levels of debt in the G7, but we have one of the highest levels of taxes. Currently, we have a 70-year high in our tax rates.”
“We’ve also put in place a package of measures to support consumers with energy prices, to make sure that nobody is having to pay more than £2,500 on their bills.”
Photo Credit: CNN
Source: CNN
