UK Chancellor John Healey has received a warning from the International Monetary Fund (IMF) ahead of this month's budget announcement: use cost-of-living relief measures prudently, or inflation could make a comeback.
In its World Economic Outlook report released on Tuesday, the IMF stated that heavily indebted countries like the UK should limit any relief measures to being "targeted and temporary" to avoid complicating efforts to curb price increases.
"Given high debt, rising borrowing costs, multiplying public budget demands, and heightened uncertainty, rebuilding fiscal space is urgent," the report noted. "Support measures should be used prudently, designed to avoid placing additional burdens on monetary policy, and withdrawn swiftly once shocks subside."
The IMF said the UK economy will grow more strongly than previously expected and is less affected by the energy shock triggered by the Iran war compared to other major economies. However, the UK and other countries still need to reduce borrowing to stabilize public debt and "contain the immediate risks posed by inflation."
This appeal increases pressure on Healey, who is reportedly preparing to announce a series of time-limited relief measures when he unveils the budget on October 28 to ease the cost-of-living burden on the public.
On Monday, the Institute for Fiscal Studies (IFS) urged Healey to clarify how he will fill a £35 billion ($46 billion) fiscal gap, or he will lose credibility in financial markets.
The IMF assumes the Strait of Hormuz will reopen by March next year and return to normal by October, based on which it forecasts the UK's average inflation rate at 3.3% this year and 2.8% in 2027. Money markets expect the Bank of England to begin raising interest rates in November to bring inflation back to its 2% target.
The IMF's forecast paints a relatively optimistic picture for the UK. The country's economic growth rate ranks among the top in the G7, inflation is expected to be brought under control faster than in the US and EU, and UK public finances are nearing a path toward sustainability.
The IMF raised its forecast for UK GDP growth in 2026 from 1% to 1.3%, while slightly lowering its 2027 GDP growth forecast from 1.3% to 1.2%, citing "higher energy prices and rising long-term interest rates dampening consumption and investment."
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