(Bloomberg) -- UK Chancellor Rachel Reeves could face a market backlash unless she makes rapid efforts to stabilize the national debt, the International Monetary Fund warned.
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The Washington-based fund said in a chapter of its Fiscal Monitor that debt risks in the UK “were elevated” and the “lack of credible plans for dealing with it can trigger adverse market reactions.” It proposed tax rises and spending cuts, adding that postponing the decision would be “risky” and “only make the required correction larger.”
With debt at 100% of GDP for the first time since 1961, Reeves has pledged to put stability at the heart of her first budget on Oct. 30 and warned “tough” decisions will be taken. But she has also signalled she wants greater room for borrowing to invest for growth and is considering changing the debt measure she uses to provide extra headroom.
One option would hand the chancellor an extra £53 billion ($69.3 billion) of borrowing capacity, potentially testing markets that have limited appetite for new debt. Investors are already being asked to absorb £138 billion of gilts from the Treasury to fund the budget deficit in the current fiscal year, plus many billions more as the Bank of England unwinds its vast quantitative-easing program.
An increase in UK government borrowing costs in recent weeks sparked concerns but the moves appear to have been driven more by prospects for interest-rate cuts in major economies rather than fears that she will let borrowing spiral upwards. Reeves is at pains to signal that there will be no repeat of the market panic triggered in 2022 when then-prime minister Liz Truss announced tens of billions of unfunded tax cuts.
The Institute for Fiscal Studies think tank has said Reeves will have to raise about £25 billion to give a real-terms boost to cash-strapped public services. Labour has already set out plans for almost £9 billion of tax rises and is means testing winter fuel payments to save a further £1.5 billion. Some of its revenue plans may be lost as a result of reviews of policies such as a proposed crackdown on wealthy “non-dom” foreigners.
The IMF analysis shows further savings are needed to bring the debt under control. The UK is one of a small group of countries, including Brazil, France, Italy South Africa and the US, for which the debt-to-GDP ratio does not stabilize in its forecasts.
The UK and the other nations need to find savings of 4.5% of GDP, about £110 billion in Britain, to have an 80% chance of preventing debt rising over the medium term, the fund’s analysis showed.
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