The International Monetary Fund has warned governments against unfunded help with the cost of living, two weeks before John Healey delivers his first Budget as Chancellor. In its latest World Economic Outlook, published on Tuesday, the fund also lowered its growth forecast for the UK in 2027 and predicted higher inflation and rising unemployment.

The IMF did not single out Britain. It said the need to reduce borrowing was urgent everywhere, and that support for households should be used sparingly and withdrawn quickly once the shock fades. Any new spending or tax cuts should be well funded, it said. Broad fuel subsidies and attempts to control prices would add pressure to public finances and could make it harder to bring down borrowing costs. The fund noted that short-term giveaways are politically difficult to withdraw once introduced.

Silvana Tenreyro, the IMF's chief economist, said the UK stands out among major economies for having already begun to consolidate its public finances.

Mr Healey has said the Budget will give households and businesses more breathing space. The Treasury is working on a temporary energy bill scheme limited to benefit claimants. He is also under pressure to keep the freeze on fuel duty, in place since 2010 at a cumulative cost of more than £120bn, and to extend the caps on prescription charges and rail fares introduced by his predecessor, Rachel Reeves. In his first week in office, the Prime Minister, Andy Burnham, removed VAT from electricity bills at a cost of £850m and capped bus fares at £2.

The Resolution Foundation, a think tank, also cautioned against blanket energy subsidies, saying they would add to inflation. It proposed a £175 discount for low-income households only, costing £2bn. It estimated that the Chancellor would need £8bn of tax rises and spending cuts to rebuild his fiscal headroom to £20bn, a level it considers prudent.

UK debt stands at 94 per cent of GDP, lower than in France and the United States. The IMF said highly indebted economies are increasingly exposed to bond market shocks and that the adjustment required may be larger than has proved feasible in the past. That may call for deeper spending cuts and a rethink of what government should do. Last week Andrew Bailey, the Governor of the Bank of England, said a failure to rein in public spending risked a repeat of the bond market crisis that followed the 2022 mini-Budget. Mr Burnham's aides are reported to have felt that Mr Bailey was trying to pile pressure on the Chancellor.

The IMF now expects the UK economy to grow by 1.2 per cent in 2027, down from 1.3 per cent, citing higher energy prices and long-term interest rates. It raised its forecast for 2026. Inflation is projected to reach 3.3 per cent this year and stay above the Bank's 2 per cent target until the end of 2027. Living standards are expected to barely grow over the next two years. Unemployment is forecast to rise from 4.9 per cent to 5.3 per cent by the end of next year, implying about 100,000 further job losses. The fund said the damage to the global economy from the war in the Middle East has been smaller than first feared.

The IMF's analysis also addressed the rise in borrowing costs. It found that about three quarters of the increase in 10-year gilt yields reflected concern over high inflation and the Bank's ability to control it. Markets had been unsettled when Mr Burnham said he did not want to be "in hock" to the bond market.

Mr Healey said the economy was showing resilience, with the UK forecast to be the joint second fastest growing G7 nation in 2026 and to have the lowest deficit in the G7 by 2031. He will meet international finance ministers in Bangkok this week. Andrew Griffith, the shadow chancellor, called for more drilling in the North Sea and tighter control of welfare spending. Robert Jenrick, Reform's economy spokesman, said the country was going bust and urged lower taxes on workers and businesses.

The Chancellor must now decide how much relief to offer while meeting the demands for fiscal discipline from the IMF, the Bank and the markets. He will set out his choices on 28 October.

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