Rishi Sunak has been urged by the IMF to consider raising taxes on those “who have benefited most from the pandemic” as it warned of inflation risks facing the UK economy.
It suggested that levying “windfall or wealth taxes” now could be one way for the chancellor to address “demand-supply imbalances” when he unveils latest budget forecasts next month.
The idea of targeting the better-off would be to shift spending by those “most likely to consume” to the future, the IMF said.
It also suggested the government raising more revenues in the short term to invest in a beefed-up version of its “build back better” growth agenda later.
The recommendations came in the Washington-based International Monetary Fund’s annual review of the UK.
It said: “The outlook suggests that growth will remain strong in 2022, but so too will price pressures and risks.”
The report said key indicators such as wage hikes, price plans by companies, and expectations for inflation shown by surveys and implied by markets all “flashed red at present”.
It backed the idea of the Bank of England steadily increasing interest rates to 1-1.5% to help bring inflation back to its 2% target over the next couple of years.
But the report also said fiscal policy – that is, the government’s tax and spending plans – could play a key role, potentially relieving the pressure to hike rates.
Too fast an increase in interest rates could threaten to recovery, the IMF said.
But too slow a pace could allow greater “second-round effects” – that is, a spiral in which the initial impact of inflation prompts workers to demand higher wages and companies to pass on higher costs in the form of price increases.
However bringing forward a planned tightening of fiscal policy from the 2023/24 financial year to 2022/23 could “help contain demand in the short run” while reducing the potential drag on growth later, the report suggested.
The report came as Bank of England governor Andrew Bailey told MPs on the Treasury select committee that second-round inflation effects were his “biggest concern” as further price pressures would hurt the worst-off the most and lead to even higher interest rates.
Inflation has already hit a three-decade high of 5.5% at the start of this year and the Bank expects it to top 7% when energy price rises take effect in April.