The International Monetary Fund on Tuesday afternoon weighed in on the massive tax-cut package and other measures at the heart of a U.K. government fiscal plan that sank the British pound and sent bond yields soaring, warning that “large and untargeted” fiscal plans risk worsening inequality and undermining monetary policy.
“We are closely monitoring recent economic developments in the U.K. and are engaged with the authorities,” an IMF spokesperson said.
The IMF said it understood that the fiscal package unveiled on Friday is aimed at helping families and businesses deal with an energy shock and at boosting growth through tax cuts and supply measures.
“However, given elevated inflation pressures in many countries, including the U.K. we do not recommend large and untargeted fiscal packages at this juncture, as it is important that fiscal policy does not work at cross-purposes to monetary policy,” the spokesperson said.
The IMF added that the nature of the U.K. measures “will likely increase inequality.”
The pound tumbled along with British government bonds as international markets reacted to the U.K. mini-budget presented on Friday, which included both tax cuts and billions of pounds in energy subsidies to help British families struggling to pay heating bills in the face of the worst inflation in recent memory.
The pound early Monday sank to a record low versus the U.S. dollar
below $1.04, while yields on U.K. government bonds, known as gilts, soared, stirring fears of a potential crisis and unsettling global financial markets.
Economist and former U.S. Treasury Secretary Lawrence Summers on Twitter late Monday worried that a collapse by the pound, a global reserve currency, could spark a global crisis and expressed surprise that the IMF hadn’t yet commented on the situation.
The volatility in U.K. financial markets stirred memories of the so-called 1976 sterling crisis, which saw Britain devalue the pound and seek an IMF bailout.
The pound was up 0.3% at $1.072 in recent action, leaving it down 1.2% for the week and 7.8% in September.
The IMF said the U.K.’s Nov. 23 budget “will present an early opportunity for the UK government to consider ways to provide support that is more targeted and re-evaluate the tax measures, especially those that benefit high income earners.”