Britain ‘heading towards IMF bailout’
Rachel Reeves’ tax-and-spend gamble is driving Britain towards a 1970s-style debt crisis and bailout from the International Monetary Fund, leading economists have warned.
They have said the Chancellor’s handling of the economy risks a return to the years of high inflation and borrowing that ended with Britain being forced to borrow billions from the International Monetary Fund (IMF) 50 years ago.
It came as leading retailers sounded the alarm over the rising cost of taxes and red tape, which is pushing the country into an era of “stagflation”.
On Saturday night, Nigel Farage, the Reform UK leader aid the economic situation was like “the 1970s all over again”, while Kemi Badenoch, the Conservative Party leader, said that the surging cost of government borrowing was “the price” of Labour’s “economic mismanagement”.
Ms Reeves is under huge pressure ahead of the autumn Budget, with forecasts showing rampant borrowing has created a £50bn black hole.
She is widely expected to put up taxes again to cover the shortfall despite warnings that doing so will only further stunt Britain’s anaemic growth.
Prof Jagjit Chadha, who recently stepped down as the head of the National Institute for Economic and Social Research, claimed the economy was at risk of “collapse”.
He said the financial situation was “as perilous the period leading up to the IMF loan of 1976”, when Britain had to be bailed out by the global banking body.
He told the When the Facts Change Substack, written by the Telegraph columnist Liam Halligan: “I’m in a world in which I could imagine it [an IMF bailout] happening, and we’ll be bereft in that case.
“We will not be able to roll over debt, we will not be able to meet pensions payments, benefits will be hard to pay out.”
‘We are in fiscal trouble’
Andrew Sentance, a former member of the Bank of England’s rate-setting Monetary Policy Committee, also said the situation was “very reminiscent of the 1970s”.
He added: “Rachel Reeves is on course to deliver a Healey 1976-style crisis in late 2025 or 26. Like Healey, she has massively boosted public spending, borrowing and taxes – fuelling both demand-pull and cost-push inflation. Unless policies are reversed, we are heading for an economic crash.
“We’ve still got bond yields that are even higher than the US. In fact, we’re even higher than Greece when it comes to borrowing costs, which is an indictment of where the UK is at the moment, or where it’s perceived to be by the financial markets.”
Surging debt and a tanking pound forced Denis Healey, the former Labour chancellor, to apply to the IMF for a bailout in 1976.
In return for loaning the cash, the IMF imposed huge public spending reductions, with Labour being forced to cut its council house-building programme.
Willem Buiter, another former member of the Monetary Policy Committee, said that, unless Ms Reeves changed course, she would face scrutiny from the markets “that will be at least as effective as the pressure from the IMF was in the 1970s”.
He said the Chancellor “will be forced” to break Labour’s manifesto and raise taxes on working people in the autumn to calm the bond markets.
“I think there’s no realistic alternative to basically breaking the commitment not to raise key taxes, personal income tax, VAT, during this Government’s term in office. So she will be forced to do that,” he added.
It came as the British Retail Consortium, which represents the country’s biggest shop and supermarket chains, sounded the alarm over rising prices.
Writing for The Telegraph, the group’s chief executive Helen Dickinson said Ms Reeves’ tax policies risked seeing food inflation stick at 5 per cent throughout next year.
In a joint article with Lord Houchen, the Tory mayor for Tees Valley, she urged Ms Reeves to reverse plans to increase business rates on big stores.
“A Budget that hits retail disproportionately hard, like the last, would keep food inflation stuck above 5 per cent well into 2026,” she warned the Chancellor.
“For households, that would feel like stagflation – slower growth, prices still rising, and no obvious way out.”
It comes amid mounting concern over the size of the national debt, which has seen international investors push up the interest rates they charge for lending to Britain.
The cost of 30-year government gilts reached 5.58 per cent on Friday, surpassing the levels seen during the chaotic fallout from Liz Truss’s mini-budget.
Britain now has the fifth-highest debt to GDP ratio in the developed world, at 96.3 per cent. As a result, debt interest payments will hit £111.2bn this year – accounting for £1 in every £12 the Government spends – according to the Office for Budget Responsibility.
Opposition politicians warned that Ms Reeves would only worsen the situation if she raised taxes to cover the cost, insisting that she must cut spending instead.
Mr Farage said the Chancellor would push Britain into “an economic doom loop” if she raised taxes again at the next Budget.
He told The Telegraph: “I have a sense of deja vu. It is the 1970s all over again, it’s just that our social position is even worse than it was then.
“We had terrible times in the 70s economically, but at least we were fairly united as a country, as a culture. This time we have bad economic times here, worse coming, in a nation that is bitterly divided, so it’s not a happy formula.
“We are in a debt spiral and I expect Rachel Reeves’ Budget in the autumn will make it even worse. In fact, we’re not very far away from being in an economic doom loop.”
And writing for The Telegraph, Mrs Badenoch said: “We’ve been here before. After the IMF bailout and the winter of discontent in the 1970s. After the financial crisis in 2008.
“In both moments, it fell to the Conservative Party to steady the ship, restore confidence, and lay the groundwork for recovery. It will fall to us again.”
