Healey should ‘stay the course’ and repair UK finances, says top IMF economist

“Stay the course” means continuing the UK’s effort to reduce its budget deficit rather than loosening policy whenever economic or political pressure rises. The IMF says Britain stands out among G7 countries because it has a plan to narrow the deficit. That matters because persistent deficits add to borrowing needs and can make public finances harder to manage.

The immediate test is the 28 October budget. Healey faces pressure to announce generous energy support before bills rise sharply in January. The IMF advises against broad subsidies and instead wants help that is temporary, targeted and non-distortionary. This would support vulnerable households without committing the government to a large, permanent spending increase.

The IMF’s message is therefore about consistency. It supports continuing fiscal repair while responding to the energy shock carefully. The Institute for Fiscal Studies warned that the budget could be a “work of fiction” unless Healey explains how to address £35bn of future spending pressures. Staying the course will require credible choices, not just promises.

The IMF now expects UK GDP to grow 1.3% in 2026. That is 0.3 percentage points higher than its July forecast. It also expects growth to slow to 1.2% in 2027, a modest 0.1-point reduction from its previous 1.3% forecast. The two changes show that a stronger current performance does not guarantee stronger future growth.

The upgrade followed UK growth of 0.6% in the first quarter and 0.5% in the second quarter of 2026. The Office for National Statistics identified strong expansion among AI-related businesses as one factor behind the surprise. Those results gave the IMF reason to raise its estimate for the year.

For 2027, the IMF expects prolonged high oil prices and rising long-term interest rates to weigh on consumption and investment. It says growth will “edge down” as energy becomes more expensive and financing costs remain elevated. The forecast therefore combines near-term resilience with a weaker outlook ahead.

The IMF is warning against across-the-board energy subsidies because they can be expensive, poorly targeted and difficult to withdraw. A universal payment or price reduction helps every household, including those able to absorb higher bills. It can also weaken the incentive to conserve energy and leave governments carrying a large fiscal cost while public finances are being repaired.

The fund’s preferred approach is “temporary, targeted and non-distortionary” support. Temporary measures end when the shock eases. Targeted measures concentrate help on households most exposed to rising bills. Non-distortionary support avoids changing prices or incentives in ways that encourage excess energy use or misallocate public money.

This advice matters before Healey’s 28 October budget. He is under pressure to announce generous help before a sharp January rise in energy bills. The IMF’s position allows support, but asks the government to limit its duration, focus and effect on economic behaviour. That balances household protection with deficit reduction.

When oil prices stay high, households face higher energy and transport costs. Less money remains for other spending. Businesses also pay more for energy, materials and distribution. These pressures can reduce profits, weaken demand and make firms more cautious about hiring or expanding. The IMF says higher energy prices will weigh on UK consumption and investment.

Long-term interest rates work through borrowing costs. Mortgages become more expensive, especially when banks face higher funding costs. Businesses also pay more to finance buildings, equipment and expansion. Projects that looked worthwhile at lower rates may no longer deliver enough returns, so investment is postponed or cancelled. Higher debt costs can also limit household spending.

The article links both pressures to slower UK growth in 2027. The IMF cut its forecast from 1.3% to 1.2% and expects growth to “edge down”. It also expects UK inflation to average 2.8% in 2027. Persistent price and financing pressure could therefore restrain demand even after strong growth in 2026.

Economic forecasts cover different periods, so stronger recent data can improve one year’s outlook while later pressures weaken the next. UK GDP grew 0.6% in the first quarter and 0.5% in the second quarter of 2026. That performance was better than expected, prompting the IMF to raise its 2026 forecast by 0.3 percentage points to 1.3%.

The article identifies strong expansion among AI-related businesses as one factor behind the early-2026 surprise. This activity helped lift output during the year. But the IMF also expects prolonged high oil prices and rising long-term interest rates to affect households and companies. Energy costs reduce disposable income, while higher borrowing costs discourage investment.

As a result, the IMF cut its 2027 forecast from 1.3% to 1.2%. The outlook is not a forecast of contraction. It is a forecast of slower growth. The contrast shows the economy can show resilience now while facing weaker consumption and investment later.

A government budget deficit occurs when public spending is greater than government revenue during a particular year. The government must usually borrow to cover that gap. Public debt is the total stock of borrowing accumulated from past deficits, after accounting for repayments. The deficit is a yearly flow; debt is the resulting longer-term burden.

Reducing the deficit means borrowing less than before. It does not necessarily eliminate debt immediately, but it slows the rate at which debt builds. For example, if a government narrows the gap between spending and revenue, it needs to issue fewer new loans. That can reduce future interest costs and leave more room to respond to emergencies or invest in services.

The IMF says the UK has already started a consolidation process and should “stay the course”. The article does not give the current deficit or debt totals. It does report £35bn of future spending pressures identified by the IFS, making a credible plan important for the 28 October budget.

Central banks change policy interest rates to influence borrowing, saving and overall demand. Higher rates make loans and mortgages more expensive, so households may spend less and businesses may delay investment. Weaker demand can reduce pressure on prices. Lower rates generally make borrowing cheaper and can support consumption, housing activity and business investment, although stronger demand can add to inflation.

The article gives a direct example in Britain. Mortgage rates have already risen because banks face higher funding costs in financial markets. The Bank of England’s monetary policy committee is widely expected to raise its policy rate in November. Policymaker Megan Greene said rates were not currently very restrictive and argued that the IMF’s growth upgrade supported higher rates.

The trade-off is significant. Higher rates may help bring inflation down, but they can weaken growth by reducing household spending and investment. The IMF expects UK inflation to average 3.3% in 2026 and 2.8% in 2027. Core inflation is not expected to return to 2% until late next year.