The International Monetary Fund on Tuesday said Britain may need to further slow the pace of its tough austerity measures to lift the country’s growth amid the risk of a major eurozone “shock”.
“Fiscal easing and further use of the government’s balance sheet should be considered if downside risks materialise and the recovery fails to take off,” said the fund’s annual report on Britain.
“If growth does not build momentum... planned fiscal adjustment would need to be reconsidered,” it added.
If growth remains low, Britain should consider temporary tax cuts and more infrastructure spending, the report said, along with monetary stimulus and a possible further cut to interest rates below 0.5 percent.
The world’s seventh largest economy slipped back into recession at the end of last year but Prime Minister David Cameron has stood by tough austerity measures, albeit at a slower pace than before.
The fund’s report noted that unemployment stood at 8.2 percent while output was more than 4.0 percent below its peak before the financial crisis.
“Unfortunately economic recovery in the UK has not yet taken hold and stresses abound,” IMF managing director Christine Lagarde told reporters, warning of the risk that low growth could become “entrenched”.
Lagarde said Britain should “use its government budget and the extra favourable financial terms on which it borrows today to support growth.”
But, she said, “I shiver” to think of “what the situation would be now had not fiscal consolidation taken place” after May 2010, when the current Conservative-led coalition took power.
“There’s no question that fiscal consolidation measures across Europe have improved the credibility of countries that have adopted them,” she added.
The fund stressed that the eurozone crisis remained the biggest risk to Britain’s economy, as the 17-nation bloc struggles to develop viable ways to keep debt-stricken Greece in the single currency.
“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,” it said.
The IMF also advocated more stimulus by the Bank of England, which has already pumped the economy with Â£325 billion (402 billion euros, $512 billion) of new cash since 2009 by purchasing assets under its quantitative easing programme.
Finance minister George Osborne said he “welcomed the IMF’s continued support for the UK’s deficit reduction programme.”
The governing coalition’s parties faced a drubbing in local polls early this month as voters lost faith in its ability to tackle the economic malaise, but Osborne said the quest for growth did not mean a change of course.
“Some have argued that events in the eurozone demonstrate that Europe, including Britain, should borrow and spend its way out of the debt crisis,” he said.
“But I very much agree with the point Christine Lagarde made a few weeks ago, that the debate about deficit reduction versus growth is a false one.”
With the government promising new legislation on banking aimed at preventing a repeat of the financial crisis, Lagarde added: “I cannot stress enough the importance of robust regulation and supervision for a global financial hub.”