IMF urges Truss to reverse top rate tax cut in rare intervention

The International Monetary Fund has urged Liz Truss to reverse the decision to abolish the top rate of income tax, in a highly unusual attack on the economic policy of a G7 country.

The world’s lender of last resort heaped pressure on Ms Truss and the Chancellor, as it urged Kwasi Kwarteng to use his fiscal plan in November to change course.

The IMF said it was “closely monitoring recent economic developments in the UK and are engaged with the authorities" and warned that the fiscal stimulus risked undermining the Bank of England’s efforts to curb inflation.

A spokesman for the Washington DC-based organisation said Mr Kwarteng's announcement in November would “present an early opportunity for the UK Government to consider ways to provide support that is more targeted and reevaluate the tax measures, especially those that benefit high-income earners”.

It is an extremely rare intervention by the IMF over a developed country’s economic policy.

The rating agency Moody's on Tuesday evening joined the IMF in warning over the Chancellor's plans, raising the spectre of a downgrade to the UK's outlook and branding the mini-Budget "credit negative".

Moody's said it was now not expecting economic growth to return to its potential until 2026, and cut its forecasts for GDP growth next year. It said the unfunded tax cuts would lead to "structurally higher deficits".

The credit ratings agency said: "A sustained confidence shock arising from market concerns over the credibility of the government's fiscal strategy...could permanently weaken the UK's debt affordability."

The comments come as a warning to the UK that it risks a downgrade to its credit rating, which would raise borrowing costs. These costs have already reached their highest level since 2011 and the wake of the financial crisis.

The IMF move drew an angry reaction from senior Tories on Tuesday night. Lord Frost, the former Brexit minister and an ally of Ms Truss, told The Telegraph: "The IMF has consistently advocated highly conventional economic policies. It is following this approach that has produced years of slow growth and weak productivity.

"The only way forward for Britain is lower taxes, spending restraint, and significant economic reform. Liz Truss and Kwasi Kwarteng are rightly focused on delivering this and they should tune out the criticism from those who are still in the intellectual world of Gordon Brown."

The Chancellor on Tuesday defended his decision to scrap the additional tax rate of income tax on a call with MPs, saying it was the “right” call despite mounting pressure. He said economic growth should return in mid-2024.

A HM Treasury spokesperson said: "We have acted at speed to protect households and businesses through this winter and the next, following the unprecedented energy price rise caused by Putin's illegal actions in Ukraine. Our Energy Price Guarantee saves households £1,000 on average and we’re halving business energy bills through the Energy Bill Relief Scheme.

“We are focused on growing the economy to raise living standards for everyone and the Chancellor has announced he will publish his Medium-Term Fiscal Plan on 23 November which will set out further details on the government’s fiscal rules, including ensuring that debt falls as a share of GDP in the medium term.”

However, senior economists have warned of the gamble the Chancellor has taken with his mini-Budget after a record-breaking rout in the pound and UK debt, amid claims a crisis in sterling could threaten global stability. The Bank of England sought to calm fears Tuesday by signalling it will raise interest rates at the next scheduled meeting of its Monetary Policy Committee on November 3.

But the IMF highlighted concerns that Mr Kwarteng and the Bank of England were pulling in opposite directions by cutting taxes while raising interest rates, saying: “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.”

The IMF warned that scrapping the top 45pc rate of income tax risks worsening inequality. Mr Kwarteng also announced a cut to the basic rate of income tax from 20pc to 19pc, a stamp duty reduction and the reversal of increases to national insurance and corporation tax.

Economists are concerned that the Treasury is making permanent tax cuts through borrowing rather than cutting spending, threatening to destabilise Britain’s public finances. Mr Kwarteng plans to sell an extra £72bn of UK debt to pay for the plan this year.

The Chancellor has vowed to stick by his plan and has attempted to calm markets by promising a plan to shore up the public finances in November. The sell-off in UK gilts continued on Tuesday despite reassurances and the pound has struggled to recover its losses since the mini-Budget.

The IMF spoke out hours after Larry Summers, the former US Treasury Secretary, warned the market turmoil in the UK risked spilling over to the world economy after the pound plunged to all-time lows and gilts suffered a record sell-off.

Mr Summers said: “A currency crisis in a reserve currency could well have global consequences. I am surprised that we have heard nothing from the IMF.”

The extraordinary intervention came as it emerged that the Treasury was drawing up plans to make it easier for hundreds of thousands of renters to get mortgages, at a time when interest rates are set to rise sharply.

The Telegraph understands officials will this week present Treasury ministers with formal advice about what to include in a major review into widening access to mortgages.

One idea being pursued is a new drive to convince lenders to accept people’s rental payments as proof that they can afford regular mortgage payments.

The plans were in progress before banks began withdrawing mortgage deals in anticipation of a rate rise from the Bank of England, but if adopted the measures could help prop up the housing market by boosting demand for property.

The Bank is expected to raise rates significantly from the current 2.25pc, with financial markets predicting that rates could hit as high as 6 per cent midway through next year.

Rates of 6 per cent would trigger a fall in house prices of between 10pc and 15pc, according to new estimates released by Capital Economics and Credit Suisse.

A Government spokesman said: “We are working across government to explore what more can be done to help people achieve their dream of owning their first home.”