Brown warned over tax cuts

The IMF headquarters in Washington

The International Monetary Fund (IMF) has warned Chancellor Gordon Brown against a pre-election giveaway in next week's Budget.

The world's financial watchdog said big tax cuts or public spending increases could cause problems for the economy.

It highlights the contribution of our prudent and cautious approach to managing the public finances

Gordon Brown

In its latest "health check" on the UK economy, the IMF said that such changes could limit the scope for interest rates cuts.

Mr Brown welcomed the report saying it outlined "the importance of economic stability".

Increased spending

The IMF backed government plans to increase spending on public services.

The IMF's report acknowledged that the government's "sound fiscal and monetary policies" had contributed to the current strength of the economy.

"Plans to increase public investment in infrastructure and human capital are justified in light of the evidence," the report said.

"Even after taking into account recent spending decisions, the fiscal position remains sound and fully consistent with the authorities medium-term fiscal framework."

Mr Brown welcomed the report

The report also said that it "expected output growth would remain robust" while "prospects for inflation remain benign".

"Additional fiscal stimulus could limit the room for further interest rate cuts," the report said.

The report also indicated that there was evidence that the UK economy was coming increasingly into line with the euro-zone - one of Mr Brown's key tests for assessing whether Britain should join the single currency.

"With regard to the criterion of sustained convergence, a few directors [of the IMF] observed that recent experience suggests that cyclical synchronisation between the United Kingdom and the euro area appears to be increasing," it said.

'Tough fiscal stance'

In a statement tonight, the Treasury said Mr Brown fully accepted the IMF's conclusions.

"That is why he has made clear that he intends in the Budget to lock in the tough fiscal stance he has set out in the pre-Budget report and Budget 2000," the Treasury said.

Mr Brown welcomed the report's findings.

"It outlines the importance of economic stability and the contribution of the government's macroeconomic framework to the ongoing success of the UK economy," he said.

"Moreover, it highlights the contribution of our prudent and cautious approach to managing the public finances to these successes in recent years."