OECD cuts UK's growth forecast as Osborne gets the budget ready
The UK economy faces significant risks from weak domestic consumption, falling house prices, fiscal consolidation and uncertain global demand, the OECD said yesterday, as it cut its growth forecast for 2011.
In a report published just a week before British Chancellor George Osborne presents his budget to parliament, the OECD also praised the British government's "ambitious" austerity measures.
However, it said the impact on spending and household income meant the recovery would be slow.
It revised down its forecast for economic growth this year to 1.5pc, from a projection of 1.7pc in November, and it urged the Bank of England to keep monetary policy loose, despite a near-term rise in inflation.
The OECD's 2011 growth forecast is lower than official government estimates of 2.1pc.
"The planned fiscal consolidation is needed to ensure that the fiscal position will be sustainable over time," the OECD said in its first full survey of the UK since 2009.
Britain is struggling to recover from its deepest downturn since World War Two and a harsh winter was only part of the reason behind an unexpected contraction in the last three months of 2010.
This has raised concerns about the strength of the recovery as the decline came even before the government implements measures to cut a record budget deficit of more than 10pc of gross domestic product.
Nonetheless, the OECD gave a ringing endorsement of the coalition government's ambitious plans to virtually eliminate the deficit over the next four years.
"While fiscal risks remain, the announcement and initial implementation of the consolidation programme strikes the right balance between addressing fiscal sustainability and thereby reducing tail-risks on the one hand, and preserving short-term growth on the other," it said.
But it said there was still room to make Britain's taxation system more efficient, by abolishing exemptions from VAT. It also suggested raising the state pension age and simplifying the benefits system.
In addition it urged the government to implement a permanent fiscal framework to guide policy beyond the current five-year horizon, to discourage any let-up in consolidation. (Reuters)