LONDON — The International Monetary Fund called on Britain's government on Wednesday to do more to speed up slow economic recovery, hinting that the country might be able to afford to borrow more to fund investment. The report is unlikely to spur finance minister George Osborne to deviate from his flagship austerity program, and does not directly urge him to defer planned spending cuts. The IMF expressed concern that a new government program to boost the housing sector might simply push up prices and called for a “clear strategy” on returning state-controlled Royal Bank of Scotland and Lloyds Banking Group to private ownership. In an annual review of Britain's economic policies, the Fund said Britain had shown “welcome flexibility” in its push to fix one of the biggest budget deficits in the European Union and noted “encouraging” signs that the economy was on the mend. “The UK is, however, still a long way from a strong and sustainable recovery. Per capita income remains 6 percent below its pre-crisis peak, making this the weakest recovery in recent history,” it said. It said “planned fiscal tightening will be a drag on growth” and called for several measures to bring about a speedier recovery that would help fix the deficit, urging Britain to take advantage of low borrowing costs to fund more investment. “Given the tepid recovery, policy should capitalize on nascent signs of recovery to bolster growth, notably by pursuing measures that address supply-side constraints and also provide near-term support for the economy,” the IMF said in a statement. “In the current context in which labor is under-utilized and funding costs are cheap, the net returns from such measures are likely to be particularly favorable.” Osborne has long said that making a conscious choice to borrow more than planned — rather than just reacting to a weaker economic environment — would damage Britain's credibility with the financial markets that fund Britain's debt. On Tuesday, a spokesman for Prime Minister David Cameron said the government was on track to return the economy to health, and Osborne has previously said he would not take on board IMF recommendations that he disagreed with. Meanwhile, IMF chief Christine Lagarde will be questioned by a French magistrate on Thursday over her role in a 285-million-euro ($366 million) arbitration payment made to a supporter of former president Nicolas Sarkozy. Lagarde risks being placed under formal investigation at the hearing for her 2007 decision as Sarkozy's finance minister to use arbitration to settle a long-running court battle between the state and high-profile businessman Bernard Tapie. Under French law, that step would mean there exists “serious or consistent evidence” pointing to probable implication of a suspect in a crime. It is one step closer to trial but a number of such investigations have been dropped without any trial. Such a move could prove uncomfortable for the IMF, whose former head, Frenchman Dominique Strauss-Kahn, quit in 2011 over a sex assault scandal, and for a woman who has been voted the most influential in France by Slate magazine. Lagarde is not accused of financially profiting herself from the 2007 payout and has denied doing anything wrong by opting for an arbitration process that enriched Tapie. However a court specializing in cases involving ministers is targeting her for complicity in the misuse of funds because she overruled advisers to seek the settlement. “The (IMF's) board is comfortable that she did not profit from this herself. For now it is not a concern,” a source close to the board said, adding that it could reconsider that position if judicial procedures took Lagarde away from her duties. Lagarde, herself a former lawyer and based in Washington since taking the IMF helm, said last month she was perfectly happy to go to Paris to answer questions about the Tapie affair. Her lawyer has played down the hearing as routine. The hearing, the first time Lagarde has been questioned over the affair, starts on Thursday and will likely run into Friday. A judge will either place Lagarde under formal investigation or give her the status of “supervised witness,” which means she will have to answer questions as a witness accompanied by a lawyer. — Reuters
