Authorities in the UK should be in a state of “heighted readiness” to counter any further slowdown in the UK, said International Monetary Fund Managing Director Christine Lagarde.
UK policies are “appropriate” for a recovery, said Ms Lagarde in a speech in London, stopping short of earlier demand for tax cuts to stimulate consumer spending. Prediction of an export led recovery by Chancellor George Osborne is slowing down in both Europe and the US and policies need to be “nimble” to counter adverse effects, she added.
“This heightened risk means a heightened readiness to respond, particularly if it looks like the economy is headed for a prolonged period of weak growth and high unemployment,” she said. Measures like increased spending on public welfare and reduced tax burden will provide an “important cushion” if the economy weakens. She urged BoE Governor Mervyn King to ease monetary policy if the economy doesn’t improve “improve soon.”
As the economy struggles with slow growth and rising inflation, the Bank of England yesterday refused to extend economic stimulus further. It maintained the key interest rate at the historic low level of 0.5% while keeping the bond program unchanged at £200 billion.
However, Chancellor Osborne said his policy tries to balance structural deficits rather than total budget shortfall where automatic stabilisers are activated when the economy faces a lean patch. The fiscal watchdog expects the present deficit of 5 percent to become zero by 2015, a year ahead of schedule, he said.
“Countries with large budget deficits and significant fiscal vulnerabilities, including the U.K., with one of the largest deficits of all, must continue to set out an implement credible deficit-reduction plans,” said Osborne while speaking on the same occasion. “Britain will stick to the deficit plan we have set out,” he added.
Economists said the Office for Budget Responsibility may be forced to lower its growth forecast from 1.7 percent for 2011 and revise government borrowing upwards when it publishes the fiscal and economic outlook report in November.