The International Monetary Fund threw its weight on Monday behind the British government's plans to squeeze public spending in order to cut a record budget deficit to almost nothing in five years.
In its annual health check on the UK economy, the IMF said things were on the mend even though the coalition's fiscal tightening plan would knock growth in the short-term and that a double-dip recession could not be completely ruled out.
"The plan greatly reduces the risk of a costly loss of confidence in public finances and supports a balanced recovery," the IMF report, known as an Article IV consultation, said.
"Fiscal tightening will dampen short-term growth but not stop it as other sectors of the economy emerge as drivers of recovery, supported by continued monetary stimulus."
The UK Treasury was clearly delighted to gain the IMF endorsement ahead of a spending review on Oct. 20 which is expected to announce cuts of 25 percent or more for most government departments and which has already been denounced as unfair by unions and opposition politicians.
"Last year the IMF said government borrowing was a risk to the recovery," a Treasury spokesman said. "This year, the IMF's verdict is that the economy is on the mend and that the government's deficit reduction plan is essential and will ensure the sustainability of the public finances."
Faced with a budget deficit of 11 percent of GDP, Conservative finance minister George Osborne announced the harshest budget in a generation in June, with big spending cuts and tax rises to take effect from next year.
While financial markets have reacted favourably, the plans remain controversial and some economists have warned that the budget risks throwing Britain back into the recession from which it only emerged at the end of last year.
On Saturday, the opposition Labour Party elected a new leader, Ed Miliband, who had campaigned on a platform of slower deficit reduction than that even pencilled in by former Labour finance minister Alistair Darling, who left office in May. The IMF said its central view was the UK economy would enjoy moderate growth and that inflation would fall gradually, and that there were balanced upside and downside risks to that scenario.
It said that it was possible that low interest rates, past sterling depreciation and the global recovery could push the British economy into faster growth and stronger inflationary pressure.
"However, downside risks are also sizeable, given the continued fragility of confidence, still-strained balance sheets among households and banks, signs of renewed housing market weakness, and the possibility that headwinds from fiscal consolidation could turn out to be more powerful than expected," it said. - Reuters