Britain’s growth prospects have been downgraded by the International Monetary Fund (IMF) just weeks before Rachel Reeves launches another tax raid in the Budget.

The IMF trimmed its forecast for UK growth next year and said a trade deal struck with the US would not offset the damage from higher tariffs imposed by Donald Trump.

In a further blow, it also warned that prices in Britain were rising even faster than in some developing economies, such as Peru and Senegal, as higher taxes and rising household bills keep inflation higher for longer.

Britain is now expected to see the highest inflation in the G7 over the next two years – eroding any growth in household incomes. It is a blow to Sir Keir Starmer’s pledge to raise living standards.

While growth this year is now expected to be slightly stronger than predicted in April, at 1.3pc in stead of 1.1pc, the IMF downgraded its projection for 2026 by 0.1 percentage point to 1.3pc.

It also means cumulative growth over the next two years is now predicted to be much lower than expected in October 2024, just before Ms Reeves launched her record £40bn tax raid.

Higher inflation means real GDP per person – often used as a proxy for living standards – is now forecast to rise by just 0.5pc next year, the weakest rate in the G7.

The IMF’s verdict came as official figures showed the jobs market continued to cool, with unemployment at a four-year high.

Rising inflation and slowing pay growth had left the typical worker barely any better off than a year ago.

The Resolution Foundation said real weekly wages had grown by just £1.50 since last September.

The IMF also singled out the UK and the US for “notable” increases in inflation compared with its forecasts a year ago.

Its latest World Economic Outlook (WEO), the IMF predicted UK price rises would average 3.4pc this year. That is much higher than a prediction of 2.1pc made last October.

Inflation is predicted to ease to 2.5pc in 2026, but not return to the Bank of England’s 2pc target until the end of next year.

Inflation in the UK is expected to be higher over the next two years than in America, where Mr Trump’s tariffs on its closest trading partners have not led to major price rises.

It is also expected to remain higher even than rates seen in several smaller and emerging market economies including Morocco, Ivory Coast, Peru and Senegal, as well as countries more prone to energy shocks such as Saudi Arabia and Oman.

The IMF warned that inflation was likely to “continue rising in 2025 partly because of changes in regulated prices” such as utility and energy bills. The Bank of England has also blamed the Chancellor’s £25bn employer National Insurance increase.

Ms Reeves hailed the 0.2 percentage point upgrade for 2025, following faster growth in the first half of this year.

She added: “This is the second consecutive upgrade to this year’s growth forecast from the IMF. But know this is just the start. For too many people, our economy feels stuck.

“Working people feel it every day, experts talk about it, and I am going to deal with it.”

On Tuesday, Ms Reeves told the Cabinet that the Government would keep working to keep down inflation, but said the “challenge” was that “growth and productivity figures over the past 15 years have kept coming in lower than expected”.

She also warned that borrowing costs and debt levels are too high, leaving less revenue available for public services, according to a spokesman.

The tepid IMF forecast comes weeks after the Office for Budget Responsibility (OBR) warned Ms Reeves that economic growth was likely to become weaker.

Ahead of the Budget on Nov 26, the Chancellor is trying to convince the Government’s independent tax and spending watchdog that major planning reforms and trade deals with the US, India and the EU will provide a significant boost to medium-term growth.

The IMF said while growth was now expected to be stronger this year than previously thought, US tariffs would weigh on activity and deal a cumulative blow of 0.4 percentage points to growth in 2025-26 compared with the forecast in October 2024.

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Further tax rises expected in November’s Budget threaten to further slow the economy.

A separate review conducted over the summer by the OBR is expected to conclude that some of the weakness in productivity seen since the global financial crisis is permanent.

This has blown a major hole in the public finances, which economists say will drive an increase in taxes of up to £30bn.

The IMF also sounded the alarm over rising government borrowing costs across advanced economies, as it noted that the UK’s long-term borrowing costs were now higher than in the US and eurozone.

The overall trend of rising yields globally was “a reason for concern” it warned, cautioning that countries risked being sucked into a doom loop of higher borrowing, lower growth and rising taxes. This could force governments to sacrifice spending on public services to pay debt interest bills.

“In light of the recent surge in long-term sovereign bond yields in major advanced economies, abrupt market reactions to fiscal vulnerabilities could have an amplified impact,” the IMF’s latest WEO warned.

The UK already spends more than £100bn a year on debt interest, or twice the size of the defence budget.

While the IMF did not single out particular countries for censure, it warned that investors could start shunning the bonds of some highly indebted countries if there were signs that borrowing was getting out of control.

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