Growth is too slow and unemploymentis too high, IMF chief warns Chancellor

Lagarde: 'Economic recovery in the UK has not yet taken hold' (PA)

George Osborne must adopt an economic "Plan B" and slow the pace of public spending cuts if the British economy remains weak, the International Monetary Fund (IMF) warned the Chancellor yesterday.

The head of the IMF, Christine Lagarde, came to the Treasury to deliver the sobering news that the Government should consider slowing spending cuts if recovery stalls. She also called on the Bank of England to do more to support the economy – presently in the grip of a double-dip recession – by printing more money.

The IMF repeated its broad backing for the Coalition's deficit reduction strategy. Unveiling its annual verdict on the British economy, Ms Lagarde said Mr Osborne's 2010 Budget had successfully steered Britain away from a potential financial crisis. "When I look back to 2010 and what could have happened without fiscal consolidation, I shiver," she said.

Nevertheless, the message that deficit reduction may need to be slowed down is awkward for the Government, given Mr Osborne's repeated assertions to the contrary.

"Unfortunately the economic recovery in the UK has not yet taken hold and uncertainties abound," said Ms Lagarde. "The stresses in the euro area affect the UK through many channels. Growth is too slow and unemployment – including youth unemployment – is too high. Policies to bolster demand before low growth becomes entrenched are needed."

The IMF suggested implementing temporary tax cuts, such as a reduction in VAT, and greater infrastructure spending, to help restore growth.

The IMF stressed that the initial response to the weak UK economy should come from the Bank of England, and urged it to extend "quantitative easing" (money printing) and consider cutting rates below their record 0.5 per cent low. However, Ms Lagarde yesterday refused to specify when it would become necessary to implement a Plan B on deficit reduction.

The IMF also recommended that the Coalition do more to protect spending on roads, public buildings and other public infrastructure projects.

There was more bad news yesterday as the Paris-based OECD cut its 2012 growth forecasts for the UK economy from 0.7 per cent to 0.5 per cent.

Despite the IMF's suggestion that a Plan B on deficit reduction might be necessary, Mr Osborne welcomed the its findings: "The IMF couldn't be clearer. Britain has to deal with its debts and the Government's fiscal policy is the appropriate one and an essential part of our road to recovery."