Britain should defer spending cuts planned for next year if growth turns out to be much weaker than forecast, the International Monetary Fund said on Tuesday.
The IMF said Britain's deficit-cutting plans were already behind forecast, but that Chancellor George Osborne should be prepared to slow them further in the short term if other measures failed to boost demand.
The IMF's budget assessment came hours after it sharply downgraded Britain's growth outlook, predicting the economy would shrink 0.4 percent this year, before growing by a tepid 1.1 percent in 2013.
The reports will make uncomfortable reading for Osborne, who will unveil updated growth and budget forecasts on December 5. Many economists already believe he will struggle to meet his goals of eliminating the structural budget deficit within five years, and putting net debt as a share of GDP on a downward path by 2015.
The IMF said a first line of defence against weaker growth would be for the Bank of England to loosen monetary policy and for the government to allow total unemployment benefit payments to rise if joblessness increased.
But if that failed to spur growth, Osborne should postpone some of the cuts planned under his flagship austerity programme to future years, it added.
"If growth should fall significantly below current ... projections, countries with room for manoeuvre should smooth their planned adjustment over 2013 and beyond. This includes ... the United Kingdom," the IMF said. The IMF gave a similar message in May, when it forecast 2.0 percent growth for 2013.
Britain's economy entered recession late last year, and the IMF said it faced headwinds from government austerity and private-sector indebtedness.
But Osborne rejected any change to his fiscal policy in a speech earlier on Monday at his Conservative Party's annual conference.
"Our critics would gamble everything ... on the dubious idea that a few billion more of spending would dramatically improve the fortunes of the trillion-and-a-half pound British economy," he told fellow party members, vowing more welfare cuts.
The IMF forecast Britain's budget deficit would total 8.2 percent of GDP this year and 7.3 percent of GDP in 2013 -- 0.3 percentage points and 0.7 percentage points higher than the body had predicted in April, though well below 2009's peak of 10.4 percent.
Partly this was due to weaker growth, but some was also due to a downgrade to the economy's potential, the IMF said.
The cyclically adjusted budget deficit -- a measure similar to the one that Osborne targets -- was forecast to fall to 5.4 percent this year and to 4.0 percent in 2013, again a slower decline than the IMF had expected.
(Reporting by David Milliken; editing by Ron Askew)