Islam Times – UK Labour risks being forced to seek emergency help from the International Monetary Fund (IMF) as Britain lurches toward a debt crisis, leading economists warned.In a warning shot to Labour leadership hopeful Andy Burnham, the former IMF chief economist Ken Rogoff said a major UK debt crisis before the end of the decade was now more likely than not, according to The Telegraph.
He said repeated shocks including COVID, Russia’s invasion of Ukraine and the war on Iran had left the country exposed to a “more than 50:50 chance” of a crisis by 2030 that would force Britain into massive tax rises or spending cuts.
If the shock led to the Bank of England losing control of inflation, the Harvard economics professor said the UK would probably need a bigger rescue package with “support” from the Washington-based lender of last resort.
He said, “In a situation like this, the IMF would be called in for technical support.”
UK Chancellor Rachel Reeves has increased debt substantially since Labour took power.
The Chancellor used her maiden Budget to authorise £70bln of public spending, only half of which was funded by a record tax raid on households and businesses.
It means Britain’s overall debt pile is on course to rise to £3tln this September, as the overall debt share heads towards 100pc of GDP.
Charlie Bean, a former official at the Office for Budget Responsibility (OBR), warned that IMF intervention was now a “material risk”.
He added, “I think the relevant point for the Government is just that it’s no longer a negligible probability, it’s something they need to factor in. There is a possibility.”
The warnings by two prominent US and British economists underline the growing concern over Britain’s fiscal health amid the highest inflation and borrowing costs in the G7.
Oliver Blanchard, another former IMF chief economist, said developed countries such as the UK and the US faced fiscal challenges.
He added, “I think it may take at least a mini fiscal crisis, with some failed auction, or spreads increasing, to get some governments to do what they need to do.”
Investors have become nervous about the outcome of a Labour leadership challenge, with Andy Burnham, the mayor of Manchester, fighting a by-election in Makerfield on June 18.
Burnham has previously said he does not want Britain to be “in hock to the bond market”.
He has also signalled he would spend more on social care and nationalise swathes of the economy.
However, Burnham has since sought to calm investors’ nerves by saying he would stick to the tax and spending rules imposed by Reeves and stepped back from a pledge to borrow to fund extra defence spending.
Rogoff, a Harvard economics professor, compared Burnham’s pledge to nationalise swathes of the economy to the radical Left-wing agenda introduced by François Mitterrand in the early 1980s.
“Mitterrand came in being Andy Burnham, and the markets collapsed,” said Rogoff.
The move triggered a collapse in the franc, rampant inflation and capital flight that forced Mitterrand to impose severe austerity just years later.
Rogoff said the UK economy was now more vulnerable than the US, even though the world’s biggest economy has higher deficits and debt levels.
He added, “The UK is definitely in more trouble than the US because there isn’t a growth story in the UK.”
Rogoff said the Government would likely use the IMF as a scapegoat.
He added, “They don’t need the IMF, but they would call the IMF. McKinsey will often get called in by a company that knows they need to fire their CEO.”
A Treasury spokesman said, “This is simply untrue. Our economic plan is the right one, with borrowing down and growth up.”
“We reduced government borrowing by £20bln last year and this year we will be borrowing less than the rest of the G7 on average – the first time since 2004. The IMF themselves have also upgraded our growth forecast this year from 0.8pc to 1.0pc,” he added.