IMF specialists name on John Healey to slash debt NOW – casting doubt over hoped-for ‘regular as she goes’ Budget

The International Monetary Fund (IMF) has warned John Healey to start slashing debt now – casting doubt on the Chancellor’s hopes for a ‘steady as she goes’ Budget.

In a message to advanced economies including Britain, IMF experts said waiting any longer to balance the books would only mean a tougher task in the future.

Delaying the necessary belt-tightening would mean seeing more money diverted to servicing debt, narrowing governments’ room for manoeuvre, they said.

‘The more countries wait, the more painful the adjustment becomes,’ IMF economists said in a blog published as part of the Fund’s annual meeting in Bangkok.

And in a separate intervention, the IMF’s chief economist Silvana Tenreyro – a former Bank of England rate-setter – urged Britain to ‘stay the course’ on getting public finances in order.

Ministers had previously been signalling an undramatic Budget sprinkled with one-off measures to help households struggling with the cost of living.

But they are now under increasing pressure to explain how they will deliver either the spending cuts or tax hikes that are needed to meet targets to reduce borrowing.

Bank of England governor Andrew Bailey weighed in last week to tell Mr Healey that the plans must be seen as ‘credible’ by markets.

And the Institute for Fiscal Studies (IFS), a leading UK economic think-tank, said that simply pencilling in cuts that the Chancellor had no intention of delivering would turn the Budget into a ‘work of fiction’.

It comes as bond market turmoil, which has pushed up the cost of borrowing, limits the Chancellor’s options. Experts believe his ‘headroom’ – the buffer against meeting fiscal targets to bring down borrowing and debt – has halved from £24 billion to £12 billion since the spring.

The bond sell-off, sparked by inflation fears caused by the Iran war, has pushed up yields on UK and other countries’ bonds. That effectively means that investors are charging more to lend to governments, adding to the urgency of tackling debt.

Over recent months, the average yield on ten-year bonds issued by members of the G7 group of major advanced economies has hit the highest level in nearly two decades, the IMF noted.

Global public debt is expected to surpass 100 per cent of global economic output by 2030 – a level last reached just after World War Two. In Britain it stands at just under £2.9 trillion, or 94 per cent of gross domestic product (GDP).

‘Higher yields leave countries with less margin for delay,’ the IMF said.

‘Major advanced economies with high debt need concrete measures anchored in credible medium-term plans and realistic assumptions.

‘This is essential to put debt on a sustainable path, contain borrowing costs, and limit spillovers to the rest of the world.’

The IMF added that higher interest payments on the debt were ‘becoming a larger and increasingly inflexible burden on public resources’, leaving less room for state investment and spending.

‘They also constrain governments’ ability to respond to downturns, just as demands for increased spending in defense, energy security, and aging populations are mounting,’ it said.

The IMF’s warning – while addressed to a number of countries – will be keenly felt in Britain two weeks before Mr Healey’s first Budget.

While Labour has set out its plans to bring down borrowing overall, it has yet to flesh out how it will do so, including how it will account for higher defence spending.

Yesterday, IMF chief economist Silvana Tenreyro said: ‘The UK has already started with the consolidation path, fiscal consolidation. It is in that trajectory, and the message for the UK is simply stay the course and continue on that trajectory.’

Simon French, chief economist at City broker Panmure Liberum, said: ‘The warning to ‘stay the course’ is code for doubts over the credibility of some of the government spending restraint pencilled in… given increased defence spending demands.

‘Those decisions tee up a very tough spending review in 2027 particularly for public sector pay – and the potential for backsliding.’

The Fund has already warned Britain and other advanced economies not to splash out on cost of living measures that they cannot afford – insisting that they should instead be tightening their belts.

In comments that could give the Chancellor second thoughts about any costly measures designed to give households ‘breathing space’, it said measures to cap fuel and other prices should be avoided.

The IMF has also cut the UK’s growth outlook for next year, from 1.3 per cent to 1.2 per cent.

Britain and crisis-ridden France –  mired in a budget crisis and violent public unrest – were the only two members of the G7 group of major advanced economies to see downgrades.