On 23 May 2023 the IMF issued a report following consultations with the UK under Article IV of the IMF’s articles of agreement.

The report notes that the UK economy is projected to maintain positive growth in 2023, avoiding a recession owing to continuing levels of strong demand as energy prices ease. The economy has however slowed in the past year owing to high inflation and problems in the labour supply following the pandemic.

Economic growth is projected to slow to 0.4% in 2023, which is higher than previously forecast owing to lower energy costs and normalization of global supply chains, combined with buoyant demand. Economic growth will rise to 1% in 2024, and will average around 2% in 2025 and 2026, as monetary and financial conditions ease. In the longer-term growth is expected to continue around 1.5% annually.

In the medium term, the IMF considers that the UK’s fiscal strategy should take into account spending pressures on services and the need for investment to increase growth potential. Additional funding is likely to be needed for possible pay agreements following the current industrial action, as well as to manage the challenges in the National Health Service and social care and to increase growth potential by investing in skills, innovation, infrastructure, and the green transition. To make room for this funding, revenue measures and structural expenditure savings are needed.

The IMF report considers that the triple lock on pensions could be replaced with indexation of pensions for inflation. Carbon taxation could be strengthened to increase momentum towards the net zero targets; and property taxes could be reformed, with measures such as updating real estate valuations and rebalancing away from transaction taxes as these affect housing and labour mobility. The efficiency and fairness of the tax system could be improved by removing opportunities for tax avoidance in capital and income taxation and national insurance contributions.

The report notes that the Spring Budget 2023 outlined supply-side measures to increase growth including an increase in childcare support and the introduction of a capital investment allowance. The “Windsor Framework” agreement with the European Union has increased business certainty; and innovation and productivity are to be increased by targeting growth areas such as advanced manufacturing, life sciences, and clean energy.

The report recommends the introduction of wider permanent capital investment incentives and predictable tax and regulatory regimes for businesses. The access of small and medium-sized firms to finance and research and development (R&D) support could be increased. Planning restrictions could be eased, and the immigration system adapted to relieve skilled labour shortages and increase labour market flexibility. Labour force participation and productivity could be increased by strengthening skills and education; and improving healthcare services.

Additional measures could be taken to achieve the net zero targets, such as extending the UK’s emissions trading scheme (ETS) and clarifying the phase-in of carbon pricing regulations. More incentives could be made available for the green transition, for example by expanding the grant program heat pump installations and home insulation for low-income households.