Investments or Savings? - Challenges for British Fiscal Policy

The latest analysis by the International Monetary Fund (IMF) suggests Rachel Reeves should reduce the British government's spending if she wants to effectively reduce national debt. Relying solely on tax increases is considered "undesirable" by the IMF. Initial global forecasts indicate that worldwide debt will exceed 100 trillion dollars for the first time this year, with countries like the UK, the USA, France, and Italy in the spotlight. These countries risk falling deeper into debt by the end of the decade. In the UK, national debt already equals 100% of GDP. The Chancellor has committed to reducing debt by the end of the parliament and has imposed a self-discipline of borrowing only for investments, aiming to reduce total debt within five years. It is expected that she will relax her debt rule to allow more leeway for infrastructure spending. Despite assuring that there will be no return to austerity, public finances are primarily to be stabilized through tax increases. The IMF, on the other hand, recommends a balanced strategy of tax increases and spending cuts. Raising taxes while simultaneously increasing government spending and reducing investments is seen as counterproductive. According to the IMF, there is room in the UK and the USA to increase revenues, but sustainable debt stabilization requires both revenue and expenditure measures. Countries with high debt levels may face difficult conditions in the bond market under an expansive fiscal policy, which could drive interest rates up. The chief economist of Citigroup in the UK, Benjamin Nabarro, has already warned of potential problems in the bond market should debt continue to rise. The IMF stresses the urgency of actively combating increasing debt, especially in leading economies like the UK and the USA, to avoid costly and risky adjustments in the long term. Ahead of Reeves' first budget plan on October 30, there are reports that she plans tax increases and spending cuts amounting to up to 40 billion pounds. The Institute for Fiscal Studies has already pointed out the necessity for increases of this magnitude to prevent the UK from returning to austerity.