PARIS, Nov 19 (Reuters) - Britain needs to come up with a concrete plan to cut its ballooning budget deficit to soothe concerns about the stability of the public finances, a leading think-tank said on Thursday.
The Organisation for Economic Co-operation and Development said ultra-loose monetary policy and government measures have helped to support the economy and would aid a return to growth in the fourth quarter of this year.
However, it has downgraded its economic forecast for 2009 as a whole and now reckons GDP will shrink by 4.7 percent, against its June forecast for a contraction of 4.3 percent. It has pencilled in growth of 1.2 percent in 2010.
And it said the government has no leeway to provide any more stimulus to boost demand and warned that the reversal of existing measures would drag on growth from next year.
"Once recovery takes hold, further consolidation is imperative," the OECD said in its quarterly update of the world economy.
"By developing and announcing more ambitious fiscal consolidation plans early and supporting them with a strong and credible medium-term fiscal framework, the government would strengthen the recovery," it said.
The government has pencilled in borrowing of 175 billion pounds for the financial year to April 2010, around 12 percent of GDP, raising concerns it is losing its grip on spending and is putting Britain's triple-A sovereign debt rating at risk.
Cutting the deficit has become a key election issue for Prime Minister Gordon Brown's Labour government, which faces an election next year.
Rating agency Fitch said this month that Britain's AAA rating was more at risk than that of any of the four big economies, especially if the government was to inject more stimulus into the economy.
Standard & Poor's lowered its outlook for Britain's top-notch rating to "negative" from "stable" earlier this year.
The think-tank also urged the Bank of England to develop a strategy for unwinding its massive monetary stimulus measures and warned that ultra-low interest rates risked creating asset price bubbles.
"Further quantitative easing could help the recovery, but its effectiveness remains uncertain. A credible exit strategy needs to be developed now to facilitate a smooth withdrawal of support, once the recovery is well established."
It said it did not expect the BoE to start tightening policy until 2011 as inflation was likely to remain below its 2 percent target for an extended period.
It said the effectiveness of the BoE's asset purchase programme remained uncertain. (Editing by Andy Bruce)