The coalition is preparing a significant boost in state-backed infrastructure investment in a fresh push for growth, the Deputy Prime Minister has indicated.
Nick Clegg said instructions had been issued to the Treasury setting out the Government’s plan to use its balance sheet to underwrite major projects such as housing.
The International Monetary Fund has urged the UK to look at fuelling infrastructure funding or cutting VAT or National Insurance if the economic situation were to worsen.
In an interview with the Financial Times, Sheffield Hallam Mr Clegg denied the shift in focus was “plan B”.
He conceded the coalition’s stark economic warnings could have a “dampening effect”, telling the newspaper Ministers had initially had no choice but to set out “in very lurid terms the state of the emergency we were facing”.
“That kind of language over a prolonged period of time can have a dampening effect on mood, which is very important in an economy,” he added.
Mr Clegg admitted the use of state balance sheets to assume additional risks on major schemes was not popular with all.
“From the top of government, a few weeks ago we decided this was the route we’re going to take,” he added. “That’s the instruction we’ve issued to the Treasury.”
In its 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” towards a sustainable budget delivered by the coalition Government’s austerity programme.
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.
It warned that the UK economy had under-performed and unemployment remained “much too high”. Growth is expected to pick up in the latter half of this year, but much productive capacity could “remain idle for a protracted period”.
Chancellor George Osborne said the eurozone was reaching “a critical point” and confirmed Britain was preparing to deal with the consequences of failure in the single currency. But he welcomed separate figures showing inflation fell to three per cent on the Consumer Prices Index in April – its lowest level for 26 months.
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.
Mr Balls accused the Chancellor of delaying moves to get the economy growing again.
“George Osborne is still saying he is going to delay acting, doing something to get our economy moving,” he said.
“He is hoping things will get better but all the evidence is that we are in recession, prices are rising, our wages are going down, unemployment is high.
“I think the IMF is right to be urging the Government to get on with it.” He said the deficit was not coming down because the economy was back in recession “and we are not doing well.”
IMF head Christine Lagarde said on Tuesday: “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.”
Asked about Ms Lagarde’s comments, Mr Balls said: “If there was no plan to get the deficit down, I would be shivering too, of course.”