OECD backs more rate cuts as slowdown bites

The west's leading think tank last night gave its seal of approval to further cuts in UK interest rates after warning that the global economic slowdown puts Britain's robust economic performance at risk.

In its annual health check on the UK economy, the Paris-based Organisation for Economic Cooperation and Development said that provided there was no plunge in the pound, the Bank of England should be ready to cut interest rates from their 38-year low.

"Looking ahead and taking into account the heightened downside risks due to the recent terrorist attacks in the United States, further interest rate cuts might be required, unless a sharp fall in the exchange rate were to boost demand and inflation."

As the chancellor, Gordon Brown, prepared to deliver his pre-budget report today, the OECD backed his plans for boosting spending on public services, which were criticised by Brussels for breaking Europe's growth and stability pact.

Describing the improvement in the public finances in recent years as "impressive," the think tank yesterday endorsed the Treasury's spending projections, set out in last summer's spending review, as "sufficiently prudent".

The Treasury said: "The fiscal projections in the last budget are consistent with any prudent interpretation of the stability and growth pact, which would take into account the economic cycle, sustainability and the important role of public investment."

Gus O'Donnell, the Treasury's chief economist, yesterday briefed the nine members of the Bank's monetary policy committee on the new fiscal projections contained in today's pre-budget report. The chancellor will revise down his predictions for economic growth and the state of the public finances, to account for the slowing global economy.

Boosting productivity - often seen as the bugbear of the British economy - is highlighted by the OECD as a priority for government policy. "By international standards, investment in both human and physical capital has been weak and sluggish productivity growth is an important reason for the longer-term decline endured by manufacturing," the OECD said.

The chancellor has made closing the productivity gap with Britain's competitors a key policy aim, but the OECD criticises the government for chopping and changing policy measures before they have run their course. "This complicates business and household decisions and makes it harder to administer and evaluate the measures," it said. It also called on the government to extend its programme of public-private partnerships to boost funding of public services.