IMF urges UK to ‘stay the course’ on borrowing amid Starmer uncertainty | Economics

The International Monetary Fund has urged Britain to “stay the course” in reducing government borrowing amid growing bond market concerns over Labour’s leadership problem.

The Washington-based fund said it was important to continue reducing the budget deficit “given market pressures and increased implementation risks” as Keir Starmer struggles to cling to power.

In its annual health check on the UK economy, the IMF praised chancellor Rachel Reeves for “striking a good balance between deficit reduction and growth-friendly spending” as it raised its 2026 growth forecasts.

After sounding the alarm last month that Britain would take the heaviest economic blow from the Iran war, he raised his growth forecasts from 0.8% to 1% to reflect Britain’s “strong pre-war momentum” and solid performance in the first quarter of the year.

Reeves said the upgrade showed the government had the “correct economic plan” after official figures released last week showed the economy was growing at a stronger rate than expected at the start of the year.

In a thinly veiled rebuke to Labor MPs considering unseating Starmer, he said: “Risking our stability while signs of progress are emerging would leave families and businesses worse off.”

The IMF intervention comes at a time of a sharp rise in government borrowing costs around the world as the economic fallout from the Iran war escalates. Investors are also worried that Labor’s leadership challenge could topple Starmer and lead his successor to increase borrowing levels.

Investors drew attention to the comments of Andy Burnham, who is the favorite to replace Starmer if he wins the by-election and returns to parliament, that the UK is “hostage to the bond markets”.

The mayor of Greater Manchester has since softened his stance and suggested at the weekend that the government was sticking to its current fiscal rules and reducing Britain’s debt levels. But he also called for a more radical policy stance, including borrowing to finance defense and nationalizing key utilities such as water and energy.

In a volatile environment in global markets, the yield (essentially the interest rate) on UK government bonds rose and then fell on Monday.

The yield on 30-year UK government bonds hit 5.8% last week, its highest level since 1998, before retreating after a tough fightback did not materialize immediately.

The IMF warned in its annual “Article IV” health check that risks to the British economy are skewed to the downside and that “domestic uncertainty could contribute to an already unstable global environment”.

The Fund stopped short of underlining the pressure on Starmer, but said Britain was besieged by difficult “economic realities” that would limit the government’s capacity for radical change.

Luc Eyraud, chief of the IMF’s UK mission, said: “Today’s policymaking is constrained by a more volatile external environment, with more frequent and overlapping shocks, a rising public interest bill that partly reflects market concerns about countries’ high debt, and the long-standing challenge of weak productivity growth.”

“These structural realities define the boundaries of policy choices and must be fully recognized in designing future policies.”

As Britons consider the possibility of a sixth prime minister in seven years, Eyraud said the economy could benefit from a period of stability and implementation of the government’s current policies.

“In a world more prone to shocks, the predictability of policies and measures that strengthen confidence and resilience are important,” he said.

Britain’s rising borrowing costs are expected to add to the government’s debt servicing costs, already adding to its £100bn annual interest bill – representing around £1 in every £10 spent by the Treasury.

As a result, Eyraud said the government had “limited fiscal space” to respond to the economic shock caused by the Iran war, which he warned would increase inflation and drag down activity later this year.

As Reeves prepares to announce additional cost-of-living support measures on Thursday, the IMF has warned that any intervention must be “targeted, temporary and cost-effective” to avoid testing financial market confidence.

The decision comes as the Chancellor is reportedly set to announce plans to scrap a 5p increase in fuel duty from September; This is a measure that will cost £2.4bn which will have a blanket impact rather than providing targeted support to the lowest income households.