MercoPress. South Atlantic News Agency

IMF backs UK plan to reduce deficit but warns on weak growth

Chancellor of the Exchequer George Osborne rejected Plan B proposed by a group of 52 UK economists in an open letter

The International Monetary Fund backed the British government's plans to reduce the budget deficit, but said tax cuts or more quantitative easing may be needed if growth proves persistently weak.

Britain's economy is likely to grow by around 1.5% in 2011 before achieving growth of about 2.5% in the medium term, the IMF estimated. But it acknowledged that there were major risks to this outlook, as for all big economies.

These risks include Euro zone debt problems, volatile commodity prices, the health of Britain's housing market and the amount of spare capacity in the UK economy.

Finance minister George Osborne welcomed the IMF annual economic assessment, which comes after he dismissed criticism from more than 50 left-leaning economists over the weekend that his plans risked derailing economic recovery.

If the economy grew as expected, the government and Bank of England policy looked about right, the IMF said.

“We consider the current deviations from forecast represent temporary factors and that the current policy mix strikes us as appropriate,” IMF Acting Managing Director John Lipsky told a news conference after the report was published.

Economists saw little change in the tone of the IMF assessment of the UK, despite the fact that growth had been slower than the IMF had forecast when it made its last so-called Article IV report in September.

The new 2011 forecast is slightly below the 1.7% estimated in the IMF April set of global economic forecasts, and the 2% forecast in the September report.

Chancellor of the Exchequer George Osborne underlined the IMF support and rejected calls for a “Plan B” to scale back his deficit-reduction plan if the economic recovery stalls.

“What our plan provides is credibility where there was no credibility, stability where there was no stability, confidence that the British economy is getting its act together,” Osborne said in an interview with BBC Radio 4’s “Today” show. “There is flexibility built into the plan. It’s flexible because it was very specifically designed to be cyclical.”

A group of 52 economists wrote to The Observer newspaper Sunday saying UK government spending cuts, the deepest since World War II, are damaging growth and increasing the deficit by reducing tax income and increasing welfare costs.

“The breakneck deficit-reduction plan, based largely on spending cuts, is self-defeating in its own terms,” said the economists including Richard Grayson of London University’s Goldsmiths College. “It will probably not manage to close the deficit in the planned time frame and the government’s strategy is likely to result in a lot more pain and a lot less gain”.

Osborne said the signatories were taking a partisan view of the economic situation and ignoring signs of growth. Employment is rising, unemployment is falling and the most recent manufacturing survey is “encouraging,” he said.

Ed Balls, Treasury spokesman for the opposition Labour Party, said the letter supported his argument that “confidence is down, and we’re now seeing, week-by-week, more evidence that the economy is stalling.” Data released May 24 showed Britain posted its largest budget shortfall for any April since monthly records began in 1993.

Osborne said his fiscal mandate is based on the structural deficit rather than the total shortfall so that automatic stabilizers can kick in if the economy hits a weak patch. The Treasury’s fiscal watchdog expects a structural deficit of almost 5% of economic output to return to balance by April 2015, a year earlier than needed under his rules.