OECD offers Osborne only partial backing

The Organisation for Economic Co-operation and Development (OECD), which represents the world's advanced economies, has offered the Chancellor, George Osborne, qualified support in his efforts to fix the UK's public finances.

In its latest survey of Britain, the OECD said: "The Government must continue its difficult fiscal consolidation and structural reform programmes to return the economy to a sustainable path."

The message was welcomed by Mr Osborne, who is fond of citing international and authoritative bodies that he says endorse his policies, including the International Monetary Fund, the Bank of England and credit rating agencies.

The OECD said the Government's deficit reduction plan had "significantly reduced fiscal risks, contributing to lower bond yield spreads and diminished uncertainty". It added that "the announcement and initial implementation of the consolidation programme strikes the right balance between addressing fiscal sustainability... and preserving short-term growth".

In a speech yesterday, delivered on a shared platform with Angel Gurría, the Secretary-General of the OECD, the Chancellor declared: "The mission of this year's Budget will be to move from rescue to reform.

"If we want Britain to succeed in the new global economy, if we want to create the high-quality jobs of the future, then we need to overcome some of the deep-rooted and long-standing weaknesses of our economy that are spelt out in this independent report."

The OECD did indeed list a series of weaknesses on the supply side of the economy, including a failure to collect more than 60 per cent of tax revenues – one of the worst records in the developed world – and shortcomings in education, housing, planning and environmental policy.

The Shadow Chancellor Ed Balls said: "On the day that unemployment has hit a 17-year high and the OECD has downgraded its growth forecast for Britain, George Osborne can take little comfort from the report he has launched in the Treasury.

"Our economy should be growing strongly this year, but George Osborne's deep spending cuts and VAT rise are sending things into reverse, with unemployment now rising again, growth stalled and consumer confidence collapsing."

The OECD downgraded its forecasts for UK economic growth in 2011 from 1.7 per cent to 1.5 per cent, well below the Treasury's prediction of 2.1 per cent.

The OECD said: "The UK economy emerged from the 2008-09 recession with elevated public and private debt and high unemployment. Strong growth and macroeconomic stability in the run-up to the crisis had hidden a build-up of significant imbalances, influenced by over-reliance on debt-finance and the financial sector, and booming asset prices."

In a broad hint to the Bank of England, the OECD also judged that Britain must keep interest rates low to maintain its recovery, even if that means high inflation in the short term.