UK must stimulate economy, says IMF
The International Monetary Fund has called for the Bank of England to stimulate UK growth with further quantitative easing or cutting the 0.5% base interest rate.
In its annual report on the state of the UK economy, the IMF said the Government should prepare an economic Plan B, featuring temporary tax cuts and increased infrastructure spending to support the UK economy should the Eurozone collapse or recovery fail to take off.
Christine Lagarde, the IMF's managing director, said: "If the economy turns out to be significantly weaker than forecast, fiscal easing should be considered... measures should be focused on supporting growth and employment."
And as the IMF warned of the 'large' risk of an escalation in the Eurozone crisis delivering a "substantial contractionary shock" to the UK economy, the OECD forecast Eurozone contractions were close to "a severe recession", with knock-on effects for the rest of the world.
Ms Lagarde acknowledged "substantial progress" in balancing Britain's books thanks to the Government's deficit-reduction programme, and complimented the Bank of England's "nimble" use of quantitative easing and interest rate cuts.
This had given Britain a "hard-won credibility" with international markets which allows ministers the scope to take measures to support growth, she said. "When I think back to May 2010, when the UK deficit was at 11%, and I try to imagine what the situation would be like today if no fiscal consolidation programme had been decided, I shiver."
But Ms Lagarde warned that although recovery is expected to gather pace towards the end of 2012, the UK economy had underperformed, with unemployment remaining "much too high" and the UK's productive capacity potentially remaining "idle for an extended period."
If the UK recovery fails to take off, ministers must be prepared to use temporary tax cuts and more infrastructure investment to give the economy a shot in the arm, even if this means reining in the Government's austerity programme, the IMF said.
To preserve credibility, any relaxation in the Government's austerity programme would have to be presented as part of a multi-year plan designed to reduce the deficit once the economy is stronger.
"An escalation of stress in the euro area could set off an adverse and self-reinforcing cycle of lower confidence and exports, higher bank funding costs, tighter credit and falling asset values, resulting in a substantial contractionary shock," Ms Lagarde said.
Despite the gloomy outlook, Chancellor George Osborne welcomed the IMF's report, saying: "The IMF couldn't be clearer today.
"Britain has to deal with its debts and the Government's fiscal policy is the appropriate one and an essential part of our road to recovery."
The UK's deficit back in May 2010, before the cuts were implemented