Britain Must Do More for Economy, I.M.F. Warns

LONDON — Britain should do more to fuel economic growth and be prepared to pump more money into its bailed-out banks if necessary, the International Monetary Fund said Wednesday in a report.

The I.M.F. said that some recent economic data from Britain were “encouraging,” but that the data did not point toward a sustainable recovery in the near term. “Activity appears to be improving, but a slow recovery remains likely,” the fund said.

That view stands in contrast to comments by the outgoing governor of the Bank of England, Mervyn A. King, who said last week that there was “a welcome change in the economic outlook” and that a recovery was “in sight.”

The fund has been a critic of the austerity program designed by George Osborne, the chancellor of the Exchequer, saying that the British economy would recover more quickly if the government slowed its spending cuts and tax increases. The I.M.F. reiterated that warning on Wednesday and called for additional public spending. Especially helpful to the economic recovery, the fund said, would be spending on transportation and energy infrastructure and on training for low-skilled workers.

“The U.K. is, however, still a long way from a strong and sustainable recovery,” the I.M.F. said, adding that the low level of capital investment and high youth unemployment remained a concern. “The prospect remains for weak growth,” the report said.

Mr. Osborne has rejected criticism of his austerity plan, saying that the spending cuts were essential to reduce the budget deficit, which in turn would keep Britain’s borrowing costs low and allow for economic growth to return.

A recovery might take even longer if demand from export markets like the euro zone does not pick up, banks continue to be reluctant to lend and the government’s austerity program turns out to be a bigger drag on the economy than anticipated.

Ed Balls, a spokesman on economic issues for the opposition Labour Party, said the report was “the call for action on jobs and growth that the I.M.F. has been threatening to deliver for many months and a stark warning of the consequences if the chancellor refuses to listen.”

In remarks before the I.M.F. released its report, Mr. Osborne said he broadly agreed with its contents but added, “There are no easy answers to problems built up in the U.K. over many years.” He added that it was “a hard road to recovery. But we’re making progress.”

The I.M.F. also said that the government should not shy from bolstering the capital of two bailed-out banks, Royal Bank of Scotland and Lloyds Banking Group, to ease the process of returning them to private ownership. The government took stakes in both banks during the financial crisis and owns 81 percent of R.B.S. and 39 percent of Lloyds.

In separate statements, R.B.S. and Lloyds said Wednesday that they would increase their capital reserves by retaining earnings and selling assets. Regulators said recently that all of Britain’s largest banks must raise a combined 25 billion pounds, or $38 billion, to make them more stable.

Article source: http://www.nytimes.com/2013/05/23/business/global/britain-must-do-more-for-economy-imf-warns.html?partner=rss&emc=rss