IMF urges UK to maintain borrowing discipline as Labour faces leadership pressure

The International Monetary Fund has urged the UK government to maintain its current course on reducing the budget deficit, praising Chancellor Rachel Reeves for balancing fiscal discipline with growth-friendly spending. In its annual Article IV consultation report, the Washington-based institution upgraded its 2026 economic growth forecast from 0.8 per cent to 1 per cent, citing strong pre-war momentum and robust performance in the first quarter of the year.

The intervention occurs against a backdrop of rising gilt yields and internal tensions within the Labour Party. The yield on 30-year UK government bonds reached 5.8 per cent last week, the highest level since 1998, before falling back as the immediate threat of a leadership challenge against Prime Minister Keir Starmer receded. Investors have expressed concern that political instability could lead to a successor increasing borrowing levels, particularly following comments by Greater Manchester mayor Andy Burnham, a potential leadership contender, regarding the UK’s relationship with bond markets.

Chancellor Reeves used the IMF’s positive assessment to argue against political disruption, stating that undermining stability when signs of progress are emerging would leave families and businesses worse off. Burnham has since softened his previous remarks, committing to current fiscal rules while still advocating for borrowing to fund defence and nationalise utilities. The IMF emphasised that policy predictability is essential in a volatile global environment, noting that domestic uncertainty adds to existing risks.

IMF mission chief Luc Eyraud warned that the British economy faces significant constraints, including a rising public interest bill and weak productivity growth. He stated that these structural realities limit the government’s capacity for radical policy shifts, leaving it with limited fiscal space to respond to the economic shock from the Iran war. Eyraud noted that the UK’s debt servicing costs are adding to an already £100 billion-a-year interest bill, which represents approximately £1 out of every £10 spent by the Treasury.

The fund cautioned that any further cost-of-living support measures, such as the reportedly planned scrapping of a 5p fuel duty increase, must be targeted, temporary, and affordable to avoid testing financial market confidence. With risks to the British economy tilted to the downside, the IMF stressed that the premium on policy predictability remains high as the government navigates a shock-prone world.