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By Martin Kelly
Pressure is increasing on UK Chancellor George Osborne to take action in order to boost a flagging economy after the IMF warned that the UK recovery had stalled and the coalition’s current economic policy was “insufficient” to absorb the economic slack.
In its annual report on the UK, the International Monetary Fund said that the Conservative led coalition will need to ease back on its austerity measures if the UK does not show signs of recovery soon.
In a damning report, the IMF warned that unless a change of direction was implemented then the UK risked “a permanent loss of productive capacity.”
According to the report, increases in tax and cuts in public spending introduced since spring 2010 have cut growth in GDP over the past two years.
Among many suggestions contained in the report were more quantative easing, which is the printing of money, and a further cut of 0.25% in the Bank of England interest rate.
There was praise for the coalition’s deficit reduction plan which has reduced the UK deficit to 8.25%, however the cost of the austerity measures has been a reduction in GDP of 2.5%.
The report also called for an injection of government funds into capital projects, something the Scottish government has been calling on for some months.
“Boosting infrastructure spending would support growth, given its high multiplier and ability to increase productive capacity.” it said.
The report gave a stark warning of long term damage should the UK’s economic stagnation persist, with a loss of skills leading to a two-tier society. As the economy picked up, it said, those with skills on the ‘inside’ in work would negotiate higher levels of pay, whilst unskilled ‘outsiders’ fell further behind.
The report comes as the UK sits in recession after the economy shrank by 0.4% in the final quarter of 2011 and by 0.3% in the first three months of this year.
On Monday, the IMF lowered its growth forecasts for the UK from 0.8% to 0.2% in 2012 and 2.0% to 1.4% in 2013.
The latest warning from the IMF follows calls from First Minister Alex Salmond for funds to be released for capital projects. The calls came as new figures showed the construction sector in Scotland had contracted by 6.9% during the last quarter, causing the country to slip into negative growth – a similar situation in the UK construction sector had led the UK into the same double-dip.
The First Minister repeated his government’s calls for funding for ‘shovel ready’ projects in order to stimulate the economy. Yesterday’s figures showed that Scotland had narrowly joined the UK in a double dip recession after two successive falls of 0.1% in Scottish GDP.
In a wide ranging interview on Newsnight Scotland Mr Salmond emphasised the importance of capital spending right now and said: “Properly targeted and ‘shovel ready’ projects, £5billion for the UK, which is over £400 million for Scotland, would make a profound difference to the construction industry immediately at this particular time.”
He added: “I don’t know of any economic recovery in history, anywhere any time which hasn’t been led by a recovery in the construction sector.”
Mr Salmond said that it was of “strategic importance right now” that investment was made available for shovel ready projects and continued: “It would pay very substantial dividends in terms of economic confidence as well as jobs creation.”
Watch the full interview: