IMF sees risk that UK is knocked off course to fix public finances

LONDON (Reuters) -The International Monetary Fund said Britain's government risked being knocked off course for meeting its targets to repair the public finances and it urged finance minister Rachel Reeves to give herself more leeway through tax or spending measures.

In a final version of an annual report on Britain's economy, the IMF said changes introduced by Reeves to the government's deficit reduction plans had enhanced the credibility and effectiveness of fiscal policy.

"Risks to this strategy must be carefully managed. In an uncertain global environment and with limited fiscal headroom, fiscal rules could easily be breached if growth disappoints or interest rate shocks materialize," the IMF said.

The Fund also said the risk of overly-frequent changes to tax and spending policy could be reduced by changes including the creation of more fiscal room for manoeuvre by Reeves to meet her targets.

"The first best (option) would be to maintain more headroom under the rules, so that small changes in the outlook do not compromise assessments of rule compliance," it said.

In response to the report, Reeves said in a statement that the Fund had backed her choices for Britain's economy to recover and that her plans would "tackle the deep-rooted economic challenges that we inherited in the face of global headwinds."

Reeves is under pressure to raise taxes later this year to remain on course to meet her budget targets, having already increased social security contributions paid by employers and along with revenue-raising measures in late 2024.

(Writing by William Schomberg, editing by William James)