The International Monetary Fund has urged the UK to 'stay the course' on reducing government borrowing, amid growing bond market concerns over a potential Labour leadership challenge. In its annual health check on the British economy, the Washington-based fund praised Chancellor Rachel Reeves for striking a balance between deficit reduction and growth-friendly spending, but warned of 'elevated implementation risks' given market pressures.
The IMF upgraded its UK growth forecast for 2026 from 0.8% to 1%, citing strong prewar momentum and robust first-quarter performance. However, it cautioned that risks are tilted to the downside, with domestic uncertainty potentially adding to an already volatile global environment. The fund stressed that Britain faces 'limited fiscal space' to respond to economic shocks, such as the Iran war, which is expected to stoke inflation and drag down activity later this year.
Investor concerns have been heightened by comments from Andy Burnham, the favourite to replace Prime Minister Keir Starmer should a leadership challenge succeed. Burnham has called for borrowing to fund defence and nationalisation of utilities, though he has since committed to current fiscal rules. The yield on 30-year UK gilts reached 5.8% last week, the highest since 1998, before easing.
Luc Eyraud, the IMF mission chief to the UK, said policymaking is constrained by a volatile external environment, rising public interest bills, and weak productivity growth. He added that there is a premium on policy predictability and measures that strengthen confidence and resilience. The IMF advised that any new cost-of-living support, expected from Reeves on Thursday, should be 'targeted, temporary and affordable' to avoid testing financial market confidence.
