Bank of England monetary policy can help to shore up the economy while Britain is cutting public spending to rein in its budget deficit, finance minister George Osborne said on Thursday.
Defending an unprecedented set of cuts worth 80 billion pounds ($126.3 billion) over four years, Osborne said he had to take action to tackle the largest budget deficit among the world's largest economies.
Pressed on whether there was an alternative plan should the shock therapy kill off a faltering economic recovery, Osborne highlighted the central bank's potential role.
"The country needs a decisive plan, we've set out the decisive plan… It has some caution built into it, there is of course the freedom for the Bank of England to deploy monetary policy tools as well," Osborne told BBC Radio 4.
Interest rates are at a historic low and the central bank's monetary policy committee is split over whether to pump more money into the economy or raise rates to curb inflation.
Next month's meeting of the committee is shaping up to be the most crucial this year, but the growing number of investors betting on imminent UK monetary stimulus may be disappointed.
Minutes this week showed 7 of 9 members of its policy council were still in favour of the status quo and it is possible that by talking dovish and keeping its powder dry, the BoE can get markets to aid the easing process.
WELFARE CUTS
Osborne rejected opposition criticism that the poorest would be hit hardest by cuts introduced by the Conservative-Liberal Democrat coalition which took office in May.
"When a country loses control of its public finances, the people who suffer most are the poorest," he told the BBC.
"People know this is a hard road we have to walk down, but it does lead to a bright future. If we don't take this path, then economic ruin lies ahead."
The Institute for Fiscal Studies, an economic thinktank, said the cuts would have a bigger impact on the bottom half of earners than the top half.
Britain will cut half a million jobs, lift the retirement age and slash welfare as part of the cost-cutting measures announced on Wednesday.
The review angered unions and put pressure on the Liberal Democrats, the junior partners in coalition who campaigned against such sharp fiscal tightening before the May election.
The coalition hopes the cuts will bring down a record peacetime budget deficit of 11 percent of GDP.
The opposition Labour Party has accused the coalition of endangering the economic recovery by cutting too much, too quickly. Opposition finance spokesman Alan Johnson called the cuts a "reckless gamble with people's livelihoods". Markets took the review in their stride and credit rating agency Fitch said it confirmed Britain's AAA credit status.
"As the economy recovers, it is appropriate for the UK to be reducing that budget deficit at a reasonable pace," David Riley, head of sovereign ratings at Fitch, told BBC radio on Thursday.
"One of the key risks for the fiscal plan is clearly if the UK economic recovery stalls or in the worst case scenario there is a double dip (recession)." (
