IMF says UK could defer spending cuts

The IMF said Britain’s deficit-cutting plans were already behind forecast, but that Chancellor George Osborne should be prepared to slow them further in the short term if other measures failed to boost demand.

The IMF’s budget assessment came hours after it sharply downgraded Britain’s growth outlook, predicting the economy would shrink 0.4 per cent this year, before growing by a tepid 1.1 per cent in 2013.

The reports will make uncomfortable reading for Osborne, who will unveil updated growth and budget forecasts on December 5. Many economists already believe he will struggle to meet his goals of eliminating the structural budget deficit within five years, and putting net debt as a share of GDP on a downward path by 2015.

The IMF said a first line of defence against weaker growth would be for the Bank of England to loosen monetary policy and for the government to allow total unemployment benefit payments to rise if joblessness increased.

But if that failed to spur growth, Mr Osborne should postpone some of the cuts planned under his flagship austerity programme to future years, it added.

“If growth should fall significantly below current ... projections, countries with room for manoeuvre should smooth their planned adjustment over 2013 and beyond. This includes ... the United Kingdom,” the IMF said. The IMF gave a similar message in May, when it forecast 2.0 per cent growth for 2013.

Britain’s economy entered recession late last year, and the IMF said it faced headwinds from government austerity and private-sector indebtedness.