The British government's forecast of a strong rebound in economic growth next year is optimistic and preparations must be made for the "worst case scenario", a group of lawmakers said on Wednesday.
Parliament's Treasury Committee, which scrutinises the ruling Labour party's economic policies, said more action was needed to increase the amount of lending in the economy quickly.
"There is still far more work to be done. Without that increase in availability the recovery of the economy will be placed in jeopardy," said John McFall, chairman of the committee, in a study of November's Pre-Budget report.
"Interest rates have fallen considerably. Soon they may be unable to fall further. We need to make sure we are prepared for the worst case scenario and make it clear to the public and businesses that the authorities will take firm action."
November's Pre-Budget report included a 20 billion pound ($28 billion) stimulus aimed at reducing the severity of the downturn and Britain has given extensive support — including bailouts and nationalisation — to its hamstrung banks.
But concerns are growing about how effective all those measures — including a small reduction in value-added tax — will be on the wider economy, raising speculation that a further fiscal stimulus may be required.
OPTIMISTIC FORECASTS
Britain's economy entered its first recession since the early 1990s at the end of last year and is expected to remain in the doldrums for the rest of this year, if not longer.
Gross domestic product contracted 1.5 percent in the three months to December, the sharpest fall since 1980.
That bigger than expected drop left the government's current forecast of a fall in GDP of about one percent this year, and growth of about 1.75 percent in 2010, looking optimistic.
"The Committee considers that the balance of risks to the Treasury's forecast … for a swift recovery in economic growth for 2010 after a significant decline in output in 2009, is on the downside," the committee said in a statement.
"The overall effect of the fiscal stimulus remains uncertain. The cost of the reduction in value-added tax is considerable and, in the view of the majority of commentators, the Treasury's analysis of its impact is an optimistic one."
The Treasury said this month's measures, including a scheme to allow banks to insure against losses from risky assets, would "remove uncertainty from credit markets and accelerate a resumption in lending".
It also said the fiscal stimulus would take time to work. "But we have already seen encouraging signs with the VAT cut contributing to the fall in inflation this December," a Treasury spokesman said. "This, hand in hand with interest rate cuts, will continue to support businesses and families."
The independent Bank of England has slashed interest rates to 1.5 percent from 5.0 percent since October and borrowing costs are expected to near zero soon, opening the door to unconventional monetary policy measures to boost the economy.
The government has given the green light to the BoE to implement so-called quantitative easing — where policymakers adjust the amount of money in the financial system rather than its cost. A framework is expected in the next few days.
"The Report notes that the risk of a self-reinforcing deflationary cycle exists in the UK economy at present and recommends that the Treasury prepare and publish the actions it may consider taking should a period of 'quantitative easing' be needed," the committee said.
