The Government should consider cutting tax and increasing state investment in infrastructure to boost growth if the economic situation worsens, the International Monetary Fund said yesterday.
Officials said the Bank of England should also act now to inject some vigour into a “flat” economy by printing money in a new round of quantitative easing or even cutting the 0.5 per cent base interest rate below its current historic low.
Ministers repeated warnings eurozone countries needed to sort out the crisis enveloping the currency but Labour said the findings were an endorsement for their “Plan B”.
In an annual report on the state of the UK economy, the IMF said that deficit reduction was “essential” in the medium term and paid tribute to the “substantial progress” by the coalition Government’s austerity programme.
IMF managing director Christine Lagarde said: “When I think back to May 2010, when the UK deficit was at 11 per cent, and I try to imagine what the situation would be like today if no such fiscal consolidation programme had been decided, I shiver.”
But the report warned of the “large” risk of an escalation in the eurozone crisis which would deliver a “substantial contractionary shock” to the UK economy.
In the case of such a shock –– such as Greek withdrawal from the single currency – or a failure of the UK economy to escape double-dip recession, the authorities should be prepared to implement short-term measures to shore up growth and to put back the target for balancing the books beyond the current date of 2017.
“If the economy turns out to be significantly weaker than forecast, fiscal easing should be considered,” she said. “Measures should be focused on supporting growth and employment.”
She warned that the UK economy had under-performed and unemployment remained “much too high”. “Policies to bolster demand before low growth becomes entrenched are needed,” she added.
The report came as the Organisation for Economic Co-operation and Development warned the eurozone was close to “a severe recession” which would have knock-on effects on the rest of the world.
Chancellor George Osborne said: “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.
“They agree that, in their words ‘reducing the high structural deficit remains essential’ and make clear in their statement that they consider the current pace of fiscal consolidation to be appropriate.”
But he warned the eurozone was reaching “a critical point” and eurozone countries needed to stand behind their currency or risk a Greek exit.
“The British Government is doing contingency planning for all potential outcomes. It is our responsibility to ensure that while we work for the best, we prepare for something worse,” he said.
Shadow chancellor Ed Balls said the IMF’s report amounted to an endorsement of Labour calls for a “Plan B” to boost jobs and growth.
“The IMF is right to call for action to boost the British economy and to stop slow growth and high unemployment causing long-term damage to our economy,” said the Morley and Outwood MP.
“A year ago, the IMF warned that if economic growth undershot expectations, the Government should boost the economy with temporary tax cuts and greater infrastructure spending – as Labour has called for in our five-point plan for jobs and growth.
“Since then our economy has been pushed into a double-dip recession. How much worse do things have to get before David Cameron and George Osborne finally take action?”