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IMF says UK should defer spending cuts if growth disappoints

By David Milliken

LONDON, Oct 9 (Reuters) - Britain should defer spending cutsplanned for next year if growth turns out to be much weaker thanforecast, the International Monetary Fund said on Tuesday.

The IMF said Britain's deficit-cutting plans were alreadybehind forecast, but that finance minister George Osborne shouldbe prepared to slow them further in the short term if othermeasures failed to boost demand.

The IMF's budget assessment came hours after it sharplydowngraded Britain's growth outlook, predicting the economywould shrink 0.4 percent this year, before growing by a tepid1.1 percent in 2013.

The reports will make uncomfortable reading for Osborne, whowill unveil updated growth and budget forecasts on Dec. 5. Manyeconomists already believe he will struggle to meet his goals ofeliminating the structural budget deficit within five years, andputting net debt as a share of GDP on a downward path by 2015.

The IMF said a first line of defence against weaker growthwould be for the Bank of England to loosen monetary policy andfor the government to allow total unemployment benefit paymentsto rise if joblessness increased.

But if that failed to spur growth, Osborne should postponesome of the cuts planned under his flagship austerity programmeto future years, it added.

"If growth should fall significantly below current ...projections, countries with room for manoeuvre should smooththeir planned adjustment over 2013 and beyond. This includes ...the United Kingdom," the IMF said. The IMF gave a similarmessage in May, when it forecast 2.0 percent growth for 2013.

Britain's economy entered recession late last year, and theIMF said it faced headwinds from government austerity andprivate-sector indebtedness.

But Osborne rejected any change to his fiscal policy in aspeech earlier on Monday at his Conservative Party's annualconference.

"Our critics would gamble everything ... on the dubious ideathat a few billion more of spending would dramatically improvethe 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 8.2percent of GDP this year and 7.3 percent of GDP in 2013 -- 0.3percentage points and 0.7 percentage points higher than the bodyhad predicted in April, though well below 2009's peak of 10.4percent.

Partly this was due to weaker growth, but some was also dueto a downgrade to the economy's potential, the IMF said.

The cyclically adjusted budget deficit -- a measure similarto the one that Osborne targets -- was forecast to fall to 5.4percent this year and to 4.0 percent in 2013, again a slowerdecline than the IMF had expected.

(Reporting by David Milliken; editing by Ron Askew)

((david.milliken@reuters.com)(+44 20 7542 5109)(ReutersMessaging: david.milliken.thomsonreuters.com@reuters.net))

Keywords: IMF BRITAIN/