The International Monetary Fund has upgraded its forecasts for UK growth, saying the country will no longer fall into recession this year, but warned the government against tax cuts it said would fuel inflation and result in a long period of high interest rates. In a message to the chancellor, Jeremy Hunt, that he should maintain his planned squeeze on public spending, the Washington-based body said tax policy should stay “aligned with monetary policy in the fight against inflation”. Any financial surpluses should be used to pay down government debt to “rebuild fiscal buffers”, it said in its annual Article IV review of the UK’s economic outlook released on Tuesday. Putting forward a more upbeat assessment of the UK’s annual growth, the IMF forecast the country’s gross domestic product would grow by 0.4% this year, tearing up its estimate in April of a 0.3% contraction. The economy is still expected to grow at the same modest pace of 1% in 2024, before rising to 2% in 2025 and 2026. IMF officials upgraded the UK forecast in response to the greater “resilience” of households and businesses during the worst of the inflation shock. London’s banking sector had also weathered better than expected the collapse of major banks in the US and Switzerland and the subsequent global financial instability. They noted that company bankruptcies had begun to increase in the UK, but said the overall picture was of an economy making a steady, if “subdued”, recovery. Inflation is expected to fall back to 5% by the end of the year and below 2% by the summer of 2024, mainly in response to falling energy prices, the report said. However, it urged the Bank of England to focus on the potential for wage growth to remain high and the price of business services to continue rising. The central bank should wait for these elements to fall before considering loosening its monetary policy, it said. The report is likely to be seen as providing cover for Hunt’s aim to restrain public spending and support efforts by the central bank to bring down inflation. Hunt said the IMF forecast was a “big upgrade” for the UK’s growth prospects, adding: “Today’s IMF report credits our action to restore stability and tame inflation. “It praises our childcare reforms, the Windsor framework and business investment incentives. If we stick to the plan, the IMF confirm our long-term growth prospects are stronger than in Germany, France and Italy – but the job is not done yet.” The chancellor, who agreed the wording of the report, is likely to use its analysis to quell demands for tax cuts within Conservative ranks. Several former ministers and backbench Tory MPs believe he should use any financial headroom in the run-up to the next general election to reduce personal and business taxes. IMF managing director, Kristalina Georgieva, said: “Inflation is a tax and it is heaviest on the poor so getting inflation under control is the right objective at the time when we are seeing record high levels over decades,” she said. “Of course it is attractive to look into ways in which the tax burden is lighter, to inject more investment opportunity. “But only when it is affordable. And at this point of time it is neither affordable or desirable because if you want to constrain demand and increase supply [to bring down inflation] you have to think what are the right policy measures.” Pat McFadden, a shadow Treasury spokesperson, said the report “reveals the fragility of the UK economy” and predicted that households would not thank the government for “sending mortgages rocketing” and “putting a question mark over Britain as a home for investment”. IMF officials took a swipe at the past year’s government leadership changes, saying that business investment had been low due to “policy and regulatory uncertainty”. It said Hunt had successfully re-established credibility “following the September ‘mini-budget’ stress episode” but he should consider giving the Office for Budget Responsibility, the independent forecaster, a bigger role when judging the impact of government budgets. Official figures released on Tuesday morning showed that the UK borrowed more than £25bn to balance the books last month, the second-highest borrowing figure for an April, and higher than expected. The rise was again driven by soaring inflation, which pushed up welfare and pension payments, and the cost of capping energy bills for homes and businesses. Separate data showed growth across UK companies slowing this month, while firms continue to increase prices. British economic growth remained centred on the service sector in May, according to the latest survey of purchasing managers by the data provider S&P Global and the Chartered Institute of Procurement and Supply. But production levels at manufacturing firms fell at the fastest pace in four months. This pulled the index’s figure for May down to 53.9, from a 12-month high of 54.9 in April. Any reading over 50 shows growth.