The bleak forecast was part of a report by the IMF in which it urged the
Government to ease austerity measures and deploy a ‘Plan B’ in early 2013 if
economic recovery fails to materialise.
Britain’s recovery has stalled with no growth over the past two years, and the
Coalition should prepare new growth policies or risk permanent damage to the economy
according to the International Monetary Fund.
The IMF said that the British economy may not be able to cope with the scale
of austerity planned for 2013-14. It argued in its latest staff report on
the UK that the Government has room to relax its deficit cutting programme
with targeted tax cuts and increased infrastructure spending should it prove
necessary.
“In particular, fiscal adjustment for 2013-14 would need to be scaled back if
growth does not build momentum by early 2013.
“Such an acceleration [of austerity] may be difficult for the economy to
handle if it remains very weak.”
Ajai Chopra, the IMF’s deputy director of the European department, said the
obvious time to address a shift in policy would be spring next year, when
George Osborne presents his next Budget.
“[The Budget] would be the natural time to look at the state of the economy
and policy responses,” he said.
Earlier this week the
IMF slashed its forecasts for growth in Britain by a bigger margin
than any other major economy and said yesterday that there were major risks
to that outlook posed by the eurozone crisis. It expects the UK economy to
grow by just 0.2pc this year, after forecasting 0.8pc growth just three
months ago. It has cut its 2013 forecast to 1.4pc from 2pc.
The IMF was hopeful that the Government’s “funding for lending scheme"
and infrastructure funding guarantees would have a positive impact, but
warned they might not be enough given the uncertain outlook.
“Slowing the pace of fiscal tightening would be the main policy lever to
support demand if growth does not pick up sufficiently even after monetary
stimulus and strong credit easing measures have been given time to work,” it
said.
The IMF suggested there was little evidence to indicate fiscal easing would
provoke a strong adverse reaction from markets: “The Government’s reduction
of deficits over the past two years has created the space for recalibrating
fiscal policy, if needed.”
It warned in its latest
staff report on the UK that post-crisis repair and rebalancing of
the ravaged economy would take longer than expected, echoing comments made
the Prime Minister to The Daily Telegraph. David Cameron said he could not
“see a time when difficult spending choices are going to go away.”
The Washington-based Fund said the Bank of England should consider a further
reduction in interest rates and expansion of quantitative easing, but
cautioned there was limited room left for significant easing of monetary
policy.
Richard Koo, chief economist at Nomura Research Institute said that Britain’s
balance sheet recession - characterised by a large scale retrenchment in
consumer and business spending - must be addressed by fiscal stimulus,
rather than “reckless” monetary easing that would have little effect.
The IMF said that according to its forecasts the Government would miss its
target for public sector debt as a percentage of GDP to be falling in
2015-16 by one year. The Chancellor should not tighten fiscal plans to
accommodate this, the IMF said.
A Treasury spokesman said: “The IMF have repeated their advice that Britain’s
fiscal plans are appropriate, that we are right to support the economy
through monetary and credit easing as well as government guarantees for
infrastructure, and that the uncertainty and instability in the eurozone is
the ‘overarching risk’ to the British economy.”
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