Clegg: Investment move 'not plan B'

The coalition is preparing a significant boost in state-backed infrastructure investment in a fresh push on growth, the Deputy Prime Minister has indicated.

Nick Clegg said instructions had been issued to the Treasury setting out the Government's plan to use its balance sheet to underwrite major projects such as housing.

It comes as the International Monetary Fund urged the UK to look at fuelling infrastructure funding or cutting VAT or National Insurance if the economic situation worsened.

In an interview with the Financial Times, Mr Clegg denied the shift in focus was "plan B".

He conceded the coalition's stark economic warnings could have a "dampening effect", telling the newspaper ministers had initially had no choice but to set out "in very lurid terms the state of the emergency we were facing". "That kind of language over a prolonged period of time can have a dampening effect on mood, which is very important in an economy," he added.

Mr Clegg admitted the use of state balance sheets to assume additional risks on major schemes was not popular with all. "From the top of government, a few weeks ago we decided this was the route we're going to take," he added. "That's the instruction we've issued to the Treasury."

In its annual report on the state of the UK economy, the IMF said that deficit reduction was "essential" in the medium term and paid tribute to the "substantial progress" towards a sustainable budget delivered by the coalition Government's austerity programme. "When I think back to May 2010, when the UK deficit was at 11%, and I try to imagine what the situation would be like today if no such fiscal consolidation programme had been decided, I shiver," said IMF managing director Christine Lagarde.

But the report warned of the "large" risk of an escalation in the eurozone crisis which would deliver a "substantial contractionary shock" to the UK economy. In the case of such a shock - such as Greek withdrawal from the single currency - or a failure of the UK economy to escape double-dip recession, the authorities should be prepared to implement short-term measures to shore up growth and to put back the target for balancing the books beyond the current date of 2017.

"If the economy turns out to be significantly weaker than forecast, fiscal easing should be considered," Ms Lagarde said. "Measures should be focused on supporting growth and employment."

She warned that the UK economy had under-performed and unemployment remained "much too high". Growth is expected to pick up in the latter half of this year, but much productive capacity could "remain idle for a protracted period". "Policies to bolster demand before low growth becomes entrenched are needed," she said.

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