IMF to probe Chancellor’s dealing with of economic system

Labour’s economic strategy will face its biggest independent test this week with the arrival of an inspection team from the International Monetary Fund.

The annual ‘Article 4′ examination – a health check by the IMF on member nations’ economies – is due to begin tomorrow. It is expected to focus on Rachel Reeves’ fiscal rules and whether they are sufficiently robust to keep Britain’s soaring borrowing and debt under control.

The Chancellor is engaged in an epic struggle to meet her pledge that day-to-day spending is fully funded by taxation. The IMF visit will be the first since Labour took office in July and a chance to look in detail at its Budget and growth strategy.

Inspectors are said to be planning a visit to Cambridge, the heart of Britain’s vibrant tech and life sciences innovation community. The Government has made much of the UK’s role as a technological powerhouse that aims to rival Silicon Valley.

But it has prioritised funding for the public sector and green projects ahead of research and development and tax breaks for entrepreneurship.

The IMF inspectors will take a special interest in Britain’s dysfunctional jobs market.

Flying the flag: The annual ‘Article 4′ examination is expected to focus on Rachel Reeves’ fiscal rules and whether they are sufficiently robust

The UK is unusual in having a population of 9.2 million working aged people who are ‘economically inactive’ – for various reasons absent from the labour market and not seeking work. The figure has soared by 700,000 since the pandemic. Many are claiming sickness benefits, with mental health a big factor.

Keir Starmer’s Government is seeking to address the issue by axing £5 billion of Personal Independence Payments (PIPs) and universal credit and improving paths back into the workforce.

The IMF is understood to have been conducting a large research study into economic inactivity in Spain and the UK, the two developed economies which have the biggest problem in this area.

Tax and spending watchdog the Office for Budget Responsibility has identified soaring health payments and the loss of tax revenues from people not working as one of the biggest threats to long-term financial stability.

The IMF is understood to be broadly supportive of Reeves’ £40 billion tax-raising Budget in October and the Government’s focus on public sector investment. But there is concern that the Chancellor left herself insufficient ‘headroom’ to meet its current spending target.

In her March spring statement Reeves was forced into finding new spending cuts and revenues to restore the £11billion of headroom she had allowed herself, which had been wiped out by stalling growth. This was partly caused by the sharp impact of the rise in National Insurance contributions on confidence and private sector investment.

Higher than forecast interest payments on the national debt are another headache. These have climbed due to erratic White House decision-making.

Among the biggest problems for Reeves are the many downgrades of forecasts for growth.

So far she has largely sought to deal with the hole in her Budget by making spending cuts. The results will be seen on June 11 when she is due to unveil a multi-year spending settlement.

The Chancellor faces increasing unrest among Labour’s backbenchers over her early decision to axe the winter fuel allowance for pensioners and the party’s assault on health benefits.

The IMF could recommend the pain is spread by further revenue-raising. That would be hard for the Chancellor, who has vowed she would not come back for more taxes.

The IMF slashed its growth forecast for the UK in April. Most big forecasters now expect the economy to grow at 1 per cent in this calendar year.

The Bank of England fears growth will be hit by trade disruption caused by Trump’s tariff wars and higher than expected inflation. Its latest forecast shows a downgrade from 1.5 to 1.25 per cent in 2026.

The IMF team will spend some time with the Bank of England.

It is generally supportive of the transparent way in which the Bank accounts for the losses of its quantitative easing programme, a legacy of the 2008 financial crisis and Covid.

The cost is passed on to the Treasury, adding to the deficit. Other central banks have chosen to absorb losses from bond buying on their own balance sheet.

The inspection is due to end with a press conference towards the end of this month.