UK may have to slow pace of cuts, says top economist

The UK may have to slow the pace of spending cuts if growth remains weak, a leading economist has suggested.

The Organisation for Economic Co-operation and Development's (OECD) Pier Carlo Padoan said there would be "merit" in the Treasury adjusting its plans if the economic outlook worsened.

Labour seized on the comments, accusing the chancellor of a "rigid" approach and urging him to "change course".

But the Treasury said the OECD had actually endorsed its approach.

Arguments over how far and fast the government is planning to cut the deficit continue to dominate the economic debate.

Labour says excessive budget cuts risk further undermining an already weak economy, could push up borrowing and make it harder to reduce the deficit.

For some time it has been urging the government - which wants to eliminate the structural deficit by 2015 through a combination of tax rises and spending cuts - to draw up a "plan B" if its approach is not working.

The OECD - a forum of the world's leading economies - downgraded its forecast for UK growth in the next two years on Wednesday.

It now expects the UK economy to expand by 1.4% this year and by 1.8% in 2012 - less than the projections of the Office for Budget Responsibility of 1.7% and 2.5% growth.

But it is now time George Osborne listened to wise advice, looked at what is happening to the economy and thought again about the speed and scale of his cuts”

The OECD's chief economist appeared to suggest there could be room for the UK to slow its deficit-reduction plans if growth continued to be sluggish.

"We see merit in slowing the pace of fiscal consolidation if there is not good news on the growth front," Mr Padoan, told the Times newspaper.

"We have seen that growth numbers are a bit weaker than expected. Should that continue to be the case, there is scope for slowing the pace."

The OECD has previously been supportive of the government's approach.

At a joint press conference with the Chancellor, George Osborne, in March, its secretary-general, Angel Gurria, remarked on the need to move "very fast and very decisively" on the deficit and backed the signals the UK government was sending on the issue.

And in its latest economic analysis published on Wednesday, the OECD said although UK borrowing might need to rise in response to any further weakening of the economy, the government had "struck the right balance" in its overall deficit-reduction strategy and this "should continue".

Asked whether there was any difference in opinion between the report and the economist's views, the OECD said Mr Padoan had signed off on the document and stood by its contents.

Sources close to the organisation said they were "surprised" if there was seen to be any discrepancy between the two.

But shadow chancellor Ed Balls suggested the evidence was mounting up that the government needed to rethink its approach.

"This is a very significant intervention," he said. "Even the OECD, which has traditionally supported government economic policy and George Osborne's deficit reduction plan, is now saying the chancellor should consider changing course," he said.

"George Osborne's rigid determination, despite all the evidence, to stick with deep and fast cuts and refuse to even consider a plan B does not boost his credibility, it undermines it.

"But it is now time George Osborne listened to wise advice, looked at what is happening to the economy and thought again about the speed and scale of his cuts."

The Treasury said the chancellor had set out plans to boost growth - including cuts to fuel duty and corporation tax and support for skills development - in March's Budget.

"The OECD has endorsed the government's economic strategy, saying that the deficit reduction plan 'strikes the right balance and should continue'," a spokesman said.

"The chancellor has been clear that the recovery is likely to be choppy given the scale of the imbalances and depth of the recession."

Speaking on Wednesday, Prime Minister David Cameron said the government had been right to prioritise deficit-reduction since coming to office and cited the fact market interest rates had fallen in the UK - while rising elsewhere in the EU - as "proof" of international support for its deficit plans.