IMF Requests UK Government to Reconsider Tax Cut Policy... Points to Monetary Policy Damage and Worsening Inequality

[Photo by AFP Yonhap News]

[Asia Economy Reporter Park Byung-hee] The International Monetary Fund (IMF) urged the UK government on the 27th (local time) to reconsider the large-scale tax cut policy announced on the 23rd (local time), according to major foreign media reports.

The IMF pointed out that large-scale fiscal policies without clear objectives could deepen inequality in the UK and undermine monetary policy. The IMF advised that instead of indiscriminately increasing government spending and drastically cutting taxes, it is necessary to establish a clear direction on which households and businesses to support.

An IMF spokesperson stated, "In a situation where prices are rising in several countries including the UK, the IMF does not recommend indiscriminate and large-scale fiscal spending," adding, "It is important that the goals pursued by fiscal and monetary policies do not conflict."

Currently, the UK has the highest inflation among the Group of Seven (G7) countries, and the Bank of England (BOE), the central bank, has recently raised the base interest rate rapidly by deciding on consecutive big steps (0.5 percentage point hikes). The IMF pointed out that the policy directions are conflicting, with the BOE focusing on tightening and the UK government pushing for expansionary fiscal policy aimed at economic stimulus.

The IMF understands that the UK government's tax cut policy intends to support households suffering from rising energy prices and to boost growth, but it pointed out that the tax cut policy conflicts with the central bank's monetary policy direction and will deepen inequality in the UK. It added that the support targets should be made clearer and the parts benefiting high-income earners should be reviewed.

On the 23rd, UK Chancellor of the Exchequer Kwasi Kwarteng announced a fiscal policy worth ?45 billion (approximately 70 trillion won) centered on tax cuts. The UK government plans to reduce the basic income tax rate from 20% to 19% starting April next year and lower the top rate applied to high earners with incomes of ?150,000 from 45% to 40%. Additionally, to stimulate housing transactions, the threshold for stamp duty tax on house prices will be doubled from the current ?125,000 to ?250,000. The previous government's plan to raise the corporate tax rate from 19% to 25% starting next year has been scrapped.

Following the announcement of the large-scale tax cut policy, the financial market has been in turmoil, with the pound plummeting and UK government bond yields soaring. This is due to concerns that the large-scale tax cut policy could increase the UK's fiscal burden.

Bloomberg reported that concerns over the UK government's large-scale bond issuance led the yield on 30-year UK government bonds to surpass 5% for the first time since 2002. The British pound showed a slight rise, somewhat stabilizing after the shock of hitting a record low the previous day. The pound-dollar exchange rate recorded $1.035 per pound, marking the pound's lowest value against the dollar ever.

The IMF stated, "We are closely monitoring the recent economic situation in the UK" and "are in close contact with UK financial authorities."

This content was produced with the assistance of AI translation services.