Rachel Reeves faces a £20billion black hole in the public finances as Britain’s economy lags behind America’s, experts warned last night.
In its latest health check on the world economy, the International Monetary Fund said the UK is on course to expand by 1.6 per cent this year and 1.5 per cent in 2026.
That is well behind the 2.7 per cent and 2.1 per cent growth expected in the US as low-tax and low-regulation Donald Trump returns to the White House next week – leaving Labour’s pledge to make the UK the G7’s fastest-growing nation in tatters.
The IMF forecast is also lower than that of the Office for Budget Responsibility – threatening to blow an even bigger blackhole into the public finances after turmoil on the bond markets pushed up borrowing costs.
Analysts at JP Morgan last night warned sluggish growth and soaring interest rates will leave the Chancellor with a £20billion shortfall.
‘Higher borrowing costs are just the tip of the iceberg, and weak growth is instead the main concern,’ said Allan Monks, an economist at the investment bank.
‘Growth prospects have deteriorated in part due to tax hikes at the last Budget. That could leave a fiscal hole worth around £20billion that the government will need to plug in the spring.’
While the outlook is bleak, the IMF also said it believes Britain grew by a weaker-than-anticipated 0.9 per cent last year after grinding to a halt under Labour.
Rachel Reeves faces a £20billion black hole in the public finances as Britain’s economy lags behind America’s, experts warned last night
Expansion is well behind the 2.7 per cent and 2.1 per cent growth expected in the US as low-tax and low-regulation Donald Trump returns to the White House next week
Analysts at JP Morgan last night warned sluggish growth and soaring interest rates will leave the Chancellor with a £20billion shortfall
The estimate will raise fresh questions over Ms Reeves’s handling of the economy given output rose by 1.1 per cent in the first six months of the year – suggesting it has gone into reverse since the election. With Britain set to be outstripped by the US, Sir Keir Starmer last night said he could strike a trade deal with Mr Trump and avoid punitive tariffs on the UK.
Dismissing criticism from Elon Musk as ‘noises off’, he told the FT: ‘What matters to me is my relationship with the US and my relationship with President-elect Trump.’
It came as official figures showed an unexpected slump in retail sales in the UK over Christmas following Ms Reeves’s £40billion tax-raising Budget. The 0.3 per cent slide in retail sales in December fuelled fears the economy contracted at the end of last year – leaving Britain on the brink of recession.
Retailer Next boss Lord Wolfson warned the tax changes in the Budget – including the £25billion increase in national insurance paid by employers – would hit jobs.
IMF chief economist Pierre-Olivier Gourinchas said that in ‘several countries’ efforts to balance the books have been ‘insufficient’. Mr Gourinchas said: ‘It is urgent to restore fiscal sustainability before it is too late.’
Responding to the report, Ms Reeves said: ‘The UK is forecast to be the fastest growing major European economy over the next two years and the only G7 economy, apart from the US, to have its growth forecast upgraded for this year.’
There are fears that Britain will fare worse than the IMF had forecast following a dramatic slump in business confidence after the Budget.