The International Monetary Fund backed the British government's plans to reduce the budget deficit on Monday, but said tax cuts or more quantitative easing may be needed if growth proves persistently weak.

Britain's economy is likely to grow by around 1.5 percent in 2011 before achieving growth of about 2.5 percent in the medium term, the IMF estimated. But it acknowledged that there were major risks to this outlook, as for all big economies.

These risks include euro zone debt problems, volatile commodity prices, the health of Britain's housing market and the amount of spare capacity in the UK economy.

Chancellor George Osborne welcomed the IMF's annual economic assessment, which comes after he dismissed criticism from more than 50 left-leaning economists over the weekend that his plans risked derailing economic recovery.

If the economy grew as expected, the government and Bank of England policy looked about right, the IMF said.

"We consider the current deviations from forecast represent temporary factors and that the current policy mix strikes us as appropriate," IMF Acting Managing Director John Lipsky told a news conference after the report was published.

Economists saw little change in the tone of the IMF's assessment of the UK, despite the fact that growth had been slower than the IMF had forecast when it made its last so-called Article IV report in September.

"All told ... the IMF statement gives the Treasury a useful thumbs-up," said David Tinsley, a UK economist at National Australia Bank.

The new 2011 forecast is slightly below the 1.7 percent estimated in the IMF's April set of global economic forecasts, and the 2 percent forecast in the September report.

HIGH UNEMPLOYMENT

Lipsky said unemployment remained "unacceptably high" and encouraged the government to press ahead with increasing the retirement age, cutting public sector pensions and relaxing planning rules to boost the economy.

Business Secretary Vince Cable warned trade unions earlier on Monday that the government would legislate to make it harder for them to call strikes if they opposed this type of plan.

Lipsky did not back opposition calls for the government to set out a clearer "Plan B" to slow cuts if growth falters.

However, the IMF did say that if growth proved persistently slow and inflation fell, then the government should think about tax cuts to help the poor and boost investment, and the Bank of England would need to consider more quantitative easing.

Nonetheless, action to boost the economy in a renewed downturn depended on inflation being under control, the IMF said.

If inflation remained high and growth slow, the government and BoE would be in a trickier position. While high inflation due to further temporary spikes in commodity prices could probably be ignored, inflation caused by a shortage of capacity in the British economy would need higher interest rates.

"A narrower output gap would also imply a higher than currently estimated structural deficit and therefore would require further fiscal tightening over the medium term," the IMF said.

Inflation was likely to remain above 4 percent this year before falling back to near its 2 percent target by the end of next year, the IMF added. If growth strengthened as expected, the BoE would probably also need to raise interest rates at a gradual pace, it said. Faster growth would require a faster pace of rate rises.

Source: Reuters By David Milliken