The International Monetary Fund has revised its growth forecast for the United Kingdom upward, but its latest assessment places the government’s fiscal credibility, not just economic momentum, at the centre of the story. The fund, whose reports are closely watched by Whitehall, now expects the UK economy to expand by 1.3% in 2026, up from the 1% it predicted in July, before growth slows in 2027 under the weight of higher energy prices and interest rates.
That upgrade carries institutional significance. The IMF said the UK is one of the only major economies on course to stabilise levels of national debt, and it projects the country will have the lowest annual borrowing in the G7 by 2031. Silvana Tenreyro, the fund’s chief economist, told BBC News on Tuesday that the UK’s debt management process is now leading the major G7 economies. “As you know, the UK has already started the consolidation process and it is the country that basically stands out, along with India,” she said. Asked whether the UK was among the countries the IMF was urging to reduce borrowing, she replied that the country had begun the process already and should “stay the course”. The head of the IMF has previously called on the world’s advanced economies to cut borrowing and reduce debt levels.
Meanwhile, the chancellor, John Healey, is making the final preparations to Andy Burnham’s new-look government’s tax and spending plans, which will be announced on 28 October. He said the government would look to “provide some breathing space” for households in the Budget. His room for manoeuvre is constrained. Government borrowing costs have surged, placing pressure on the chancellor to ensure his plans are credible in the eyes of financial markets, which the UK relies on to borrow money.
The forecast itself is conditional. The IMF warned that the economic fallout from the US-Iran war remains “highly uncertain”, even though economies across the world have proved more resilient to the energy price shock caused by the conflict. The reversal of downgrades made at the start of that war means the UK is expected to have the second-fastest growing economy in the G7, along with Germany. But growth is estimated to slow to 1.2% in 2027 as higher energy prices and long-term interest rates weigh on household spending and business investment. The fund also flagged that households are likely to continue feeling the pinch of rising prices, with inflation expected to average 3.3% this year and remain above the Bank of England’s 2% target in 2027 at 2.8%. The Bank itself has predicted inflation could rise above 4% at the beginning of next year, making it more likely that interest rates will rise.
Oversight bodies are watching closely. In March, the official forecaster, the Office of Budget Responsibility, predicted growth of 1.6% next year, while the IMF now expects 1.2%. The OBR is working on a new forecast, and it is that figure on which the chancellor will base his Budget decisions. Sir Howard Davies, former deputy governor of the Bank of England, told the BBC the IMF’s growth forecast was “better than it might have been”, but noted that for 2027 it remained “more pessimistic”. He described the UK as “a bit of a sideshow” in the global economy, arguing the IMF is more focused on how much the US is adding to its debt pile. “Unless the US does something about its deficit, we can expect interest rates to be higher, which of course increases our debt interest costs,” he said. He added that the IMF was giving the UK credit in its forecast for tax rises which it might not end up actually putting through. The full reference report is published at https://www.bbc.co.uk/news/articles/cmglw0r21zexo.
Political pressure on the chancellor is mounting from several directions. Economists have suggested Healey faces having to find £35bn to avoid cuts to public spending while meeting defence promises in his first Budget. On Tuesday, the Resolution Foundation called on him to “make repairs” to the public finances, while saying well-targeted support was needed for those “struggling to heat their homes”. Andrew Griffith, the Conservative shadow chancellor, warned that if Healey “reaches for more tax rises” in his Budget, “he is choosing slower growth and working people will pay for it”. Burnham, meanwhile, has pledged to create “good growth in every postcode” as part of plans to give nations and regions more control, though his strategy has faced criticism inside his own party.
Healey acknowledged that wars in the Middle East and Europe were “hitting people in the UK and around the world”, but added that “Britain’s economy is showing strong international resilience”. He is expected to meet other finance ministers at the IMF’s annual meeting in Bangkok, Thailand, on Tuesday to discuss how the economic impact of those conflicts could be limited. The fund, for its part, said the global economy had shown a “remarkable capacity to absorb shocks”, not just from the current Middle East conflict but also from the Covid pandemic and Russia’s invasion of Ukraine. Whether the UK’s upgraded outlook survives contact with the Budget will depend on the chancellor’s ability to keep his fiscal plans credible while the OBR’s next forecast sets the baseline for his decisions.