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VAT cuts plan suggested by IMF
The Government should consider cutting VAT or National Insurance and increasing state investment in infrastructure to boost growth if the economic situation worsens, the International Monetary Fund (IMF) said.
Officials also said that the Bank of England should act now to inject some vigour into a "flat" economy by printing money in a new round of quantitative easing or even cutting the 0.5% base interest rate below its current historic low.
In an annual report on the state of the UK economy, the IMF said that deficit reduction was "essential" in the medium term and paid tribute to the "substantial progress" towards a sustainable budget delivered by the coalition Government's austerity programme.
"When I think back to May 2010, when the UK deficit was at 11%, and I try to imagine what the situation would be like today if no such fiscal consolidation programme had been decided, I shiver," said IMF managing director Christine Lagarde.
But the report warned of the "large" risk of an escalation in the eurozone crisis, which would deliver a "substantial contractionary shock" to the UK economy.
In the case of such a shock - such as Greek withdrawal from the single currency - or a failure of the UK economy to escape double-dip recession, the authorities should be prepared to implement short-term measures to shore up growth and to put back the target for balancing the books beyond the current date of 2017.
"If the economy turns out to be significantly weaker than forecast, fiscal easing should be considered," said Ms Lagarde. "Measures should be focused on supporting growth and employment."
Chancellor George Osborne warned that the eurozone was reaching "a critical point" and confirmed that Britain was preparing to deal with the consequences of failure in the single currency. But he welcomed separate figures showing inflation fell to 3% on the Consumer Prices Index in April - its lowest level for 26 months.
"The IMF couldn't be clearer today. 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," said Mr Osborne.
Shadow chancellor Ed Balls said the IMF's report amounted to an endorsement of Labour calls for a "Plan B" to boost jobs and growth. "The IMF is right to call for action to boost the British economy and to stop slow growth and high unemployment causing long-term damage to our economy," he said.