(Bloomberg) -- The UK government should not cut taxes in the budget because it needs the money to invest in public services and get the national debt under control, the International Monetary Fund said.

The intervention from the Washington-based institution comes just over a month before Prime Minister Rishi Sunak’s government unveils what could be the last major fiscal event before a national election likely to be held later this year. 

With the ruling Conservative Party trailing far behind Labour in opinion polls, Chancellor Jeremy Hunt is expected to announce a series of tax cuts in a bid to win over voters.

“What we are seeing in the UK, and a number of other countries, is there is a need to put in place medium-term fiscal plans that will accommodate a very significant increase in spending pressures,” IMF Chief Economist Pierre-Olivier Gourinchas told a news conference in Johannesburg.

“In the case of the UK, you might think of spending on health care and modernizing the NHS, spending on social care, on education. You might think about critical public investment to address the climate transition, but also to boost growth.”

“That requires a combination of tax and spending measures to make sure you can allocate the resources when they need to be allocated, but at the same time preventing debt levels from increasing. In that context, we would advise against further discretionary tax cuts.”

Tax Rises Urged

An IMF spokesperson had earlier clarified that, rather than cutting taxes, the UK should be raising them. “Accommodating these needs while stabilizing the debt to GDP ratio will already require additional fiscal savings, including on the tax side,” the person said.

“The IMF has recommended strengthening carbon and property taxation, eliminating loopholes in wealth and income taxation, and reforming the pensions triple lock.” The triple lock is a commitment to increase the state pension each year by a minimum of 2.5%.

Sarah Olney, Treasury spokesperson for the Liberal Democrats, an opposition party, said the IMF’s “damning verdict confirms that this Conservative government is mismanaging our economy in the worst way.”

In its World Economic Outlook Update published Tuesday, the IMF forecast that the UK will grow 0.6% this year and 1.6% in 2025. Across the two years, the UK performs better than Germany, Japan and Italy among major advanced economies but behind the US, Canada and France. 

The projections assume the Bank of England delivers two quarter-point cuts in the second half of the year, taking interest rates to 4.75%, the IMF spokesperson said. Hunt said he’s still considering what measures to put into his budget.

“It is too early to know whether further reductions in tax will be affordable in the budget,” the chancellor said in a statement. “But we continue to believe that smart tax reductions can make a big difference in boosting growth.”

The IMF last intervened in UK government policy in September 2022, when it openly criticized then-Prime Minister Liz Truss’s disastrous mini-budget that triggered turmoil on financial markets. 

Relations have improved under Sunak, who reversed most of the unfunded tax cuts proposed by Truss, but the fund’s latest stance places it at odds with the government’s clear ambition.

Economists have warned that current spending plans are undeliverable because they imply deep real-terms cuts for departments that are already struggling after years of austerity. Last week, the chair of the Office for Budget Responsibility highlighted the longer-term pressures on the public finances from an aging population. 

However, Hunt is expected to use any headroom he gets in March from lower-than-expected debt servicing costs to reduce the tax burden, which is at its highest level since World War II — to the dismay of many Conservative lawmakers. In November, he cut 2 percentage points off national insurance, a payroll tax, and made a tax relief on business investment permanent in what was the biggest package of tax cuts to be implemented since the 1980s.

The IMF’s growth forecast was complicated by changes to past GDP data by the UK Office for National Statistics. 

Growth for 2025 was downgraded by 0.4 points because revisions mean the recovery from the pandemic was much better than thought. As a result, there is less catch-up growth to be had. The size of the economy is bigger now than at the IMF’s previous forecast in October.

--With assistance from Eric Martin.

(Updates with quotes from IMF chief economist and reaction)

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