© Reuters. FILE PHOTO: British Chancellor of the Exchequer Kwasi Kwarteng walks outside a hotel, as Britain’s Conservative Party’s annual conference continues, in Birmingham, Britain, October 4, 2022. REUTERS/Toby Melville/File Photo
By William Schomberg
LONDON (Reuters) – British finance minister Kwasi Kwarteng, fresh from sowing turmoil in financial markets with a plan for big tax cuts, heads to Washington this week with International Monetary Fund criticisms of his new policy direction ringing in his ears.
Kwarteng is due to attend the IMF’s semi-annual meeting of global policymakers for the first time since being put in charge of Britain’s economy by Prime Minister Liz Truss and tasked with delivering on her promises of ending policy-making “orthodoxy”.
On Sept. 23, Kwarteng made his first fiscal announcement including a controversial plan to scrap Britain’s top income tax rate for the highest earners, part of a package of measures he said would speed up sluggish economic growth.
But the IMF took the rare step of criticising the proposals, saying they could worsen inequality and work at cross-purposes with the Bank of England’s drive to tame surging inflation which is the highest among the Group of Seven rich nations.
There was also criticism from the U.S. White House, where economic adviser Brian Deese said the sharp reaction of financial markets to the measures was understandable given the potential they had for pushing up British interest rates.
Last week, a rebellion within the ruling Conservative Party forced Kwarteng and Truss to drop the idea of scrapping the 45% top rate of tax.
But they are sticking to their plans to immediately reverse an increase in social security contributions – designed to help fund the health service – and to ease the tax burden for individual earners and companies next April.
Adam Posen, head of the Peterson Institute for International Economics, said policymakers from other countries heading for Washington had enough on their plates – from the economic impact of Russia’s invasion of Ukraine to the recovery from coronavirus – without being distracted by Britain’s problems.
Kwarteng might focus on how Britain remains part of the international consensus by committing money to Ukraine’s reconstruction and backing the United States in its attempts to tackle China’s international lending practices, he said.
“If Kwarteng decides to lecture back, let alone publicly dissent from the G7 consensus, then things will go very badly for him,” Posen, a former BoE rate-setter, said.
In a nod to concerns about the impact of his plans on Britain’s public finances, Kwarteng announced on Monday he was bringing forward the date for announcing his medium-term budget plans and independent forecasts on how much they would cost.
BoE Governor Andrew Bailey is also due to attend the IMF meetings this week, from where he will watch how investors react to the central bank’s newly expanded measures to calm financial markets after the turmoil sparked by Kwarteng last month.
The BoE said on Monday it was taking further steps to ensure the emergency bond-buying scheme concludes smoothly on Friday.
Bailey and his colleagues are preparing to raise interest rates again in early November with investors betting they could opt for a whole percentage-point hike to show they will not let Kwarteng’s stimulus push add to Britain’s inflation problem.