UK Government mulls Plan B for economy if recovery stalls

Wednesday, 15 December 2010 23:52 - - {{hitsCtrl.values.hits}}

LONDON (Reuters) - The government said it was always considering different scenarios for the economy after a leading finance newspaper reported the UK’s top civil servant had drawn up a list of stimulus measures should planned spending cuts derail economic recovery.

The newspaper said the first line of stimulus would probably be more quantitative easing by the Bank of England, citing a document compiled by Cabinet Secretary Gus O’Donnell, who heads Britain’s civil service.

The document also suggests the BoE could lend directly to businesses through buying corporate as well as government bonds, while the government might accelerate infrastructure spending, or cut taxes, the newspaper said.

Prime Minister David Cameron’s official spokesman declined to confirm or deny the existence of any “plan B” document, saying ministers had not asked for any advice as they were convinced of the government’s plans to reduce borrowing.

“The prime minister has always made the point on these things that he’s in favour fiscal conservatism and monetary activism,” he told reporters.

“I’m not going to get into the process issues about who’s written what papers. But it’s completely normal in my experience for Treasury to be thinking about different scenarios for the economy. You would expect them to be doing that kind of work.”

Although Britain has rebounded strongly from an 18-month recession, many analysts worry that 81 billion pounds of spending cuts starting next year could cap growth at a time when the recovery is already at risk from the euro zone debt crisis.

The Office for Budget Responsibility -- an independent body tasked with devising the growth and borrowing forecasts on which the government’s spending plans are based -- last month cut its growth forecasts for 2011 and 2012 to 2.1 percent and 2.6 percent, respectively.

But most private sector analysts reckon those assumptions are still too optimistic and have pencilled in growth of 1.9 percent in 2011 and 2.1 percent in 2012.

Labour party finance spokesman Alan Johnson said the report highlighted the risky strategy being followed by the Conservative-Liberal Democrat coalition, which is expected to cost 330,000 public sector jobs over four years.

“Even David Cameron’s top civil servant thinks he needs a plan B on the economy. The truth is he shouldn’t be gambling with growth and people’s jobs in the first place,” Johnson said in a statement.