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Osborne may have to ditch austerity, warns IMF


The IMF told the government if the ecomony doesn't improve soon it should change tack

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The government will have to curb its strict austerity programme and cut taxes if the economy fails to recover by early next year, the International Monetary Fund cautioned on Thursday.

The economy entered its second recession at the end of last year and has struggled to regain momentum while the government has been criticised for failing to adjust its strict public spending cuts.

The IMF said Britain faces "significant challenges" from a stalling recovery, high unemployment and threats from the euro zone, and that the Bank of England may be losing its ability to support demand while the government cuts spending.

Ditching or postponing the austerity programme, aimed at reducing the huge budget deficit, would mark yet another embarrassing u-turn for chancellor George Osborne and the coalition government.

The government had set itself the goal of largely eliminating the deficit over the current parliament when it came to power in 2010.

Weak growth since then has meant this deadline has slipped, and in a newspaper interview published on Thursday, Prime minister David Cameron said spending cuts could last until 2020. A national election is due in 2015, and the opposition Labour Party backs a slower pace of spending cuts.

The IMF's final conclusions after its annual assessment of the economy echoed the recommendations given right after the meetings with officials in May, when IMF chief Christine Lagarde (pictured) said policymakers should bolster demand before low growth becomes entrenched.

The IMF stopped short of calling for an immediate change to policy, saying recent BoE stimulus and measures to boost bank lending should be given time to bear fruit.

But it warned that a long period of stagnant growth and "alarming" youth unemployment could do lasting damage.

"Scaling back fiscal tightening plans should be the main policy lever if growth does not build momentum by early-2013 even after further monetary stimulus and strong credit easing measures," the IMF's staff said.

Fiscal tightening may need to ease earlier if the outlook deteriorates sharply before then, they said. "Temporary easing measures in such a scenario should focus on infrastructure spending and targeted tax cuts," they added.

photo credit: Reuters

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Osborne may have to ditch austerity, warns IMF
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