The International Monetary Fund on Tuesday supported Britain’s decision to slow the pace of tough austerity measures to lift the country’s growth amid major risks from the eurozone debt crisis.
“The slower pace of fiscal consolidation this year is appropriate,” said IMF managing director Christine Lagarde at the release of the fund’s annual country assessment for Britain.
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.
A weak recovery from the financial crisis was a sign that fiscal rebalancing would take longer than expected, the IMF said in its report.
“Unfortunately economic recovery in the UK has not yet taken hold and stresses abound,” Lagarde told reporters.
“Growth is too slow and unemployment, including youth unemployment, is too high… (there is) a risk of low growth becoming entrenched.”
The report said that if growth remains low, the government should consider temporary tax cuts and more infrastructure spending.
It advocated further stimulus by the Bank of England, which has already pumped the economy with £325 billion (402 billion euros, $512 billion) of new cash since 2009 by purchasing assets under its quantitative easing programme.
“Evidence suggests that QE can continue to support demand by lowering long-term interest rates and improving banks’ liquidity,” it said.
But the main risk remains from the eurozone, it added.
“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,” the IMF said.
It added: “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.”