* OECD thinktank: Further UK fiscal consolidation essential
* Inflation, fiscal tightening will subdue growth in 2010
* Uncertainty means fiscal outlook may be worse than thought
By Peter Griffiths
LONDON, May 26 (Reuters) - Britain's new coalition government must announce a strong and credible medium-term plan to cut its record budget deficit or risk driving up inflation and damaging the recovery, a thinktank said on Wednesday. The Organisation for Economic Co-operation and Development (OECD) said policymakers will have to balance the fragile state of the economy with the need to maintain credibility when they decide on the pace of cuts.
"A concrete and far-reaching consolidation plan needs to be announced upfront," it said in a report on the economic outlook. "A weak fiscal position and the risk of significant increases in bond yields make further fiscal consolidation essential."
Britain has a budget deficit running at 11 percent of GDP and is emerging from its worst recession since the war. The government will set out its spending plans in an emergency budget on June 22 after announcing a first stage of cuts on Monday. [ID:nLDE64N0X4]
The Paris-based thinktank, funded by 30 countries including Britain, said UK policymakers face "substantial challenges" over fiscal decisions, particularly as estimates of the loss of output during the economic crisis are highly uncertain.
If bond yields rise faster than expected or inflation edges further above its 2 percent target, Britain may need to take tougher measures to maintain credibility.
"The underlying fiscal position could be even worse and inflation pressures would build up quicker than expected, forcing swifter and more dramatic policy tightening," it said.
The planned fiscal contraction amounts to 2 percent of GDP between 2009 and 2011. Fiscal deficits are projected to stay above 10 percent of GDP in 2010-11 and gross public debt is expected to rise to 86 percent of GDP in 2010-11, the OECD said.
Fiscal tightening, high inflation and the effects of the credit crunch will subdue growth in 2010.
However, rising global demand for Britain's exports and sterling's weakness will underpin the recovery in 2010-11, the survey said. After a weak 2010, stronger household consumption and rising business investment should bolster the recovery.
Unemployment will bottom out in the second part of 2010 before slowly picking up during 2011, the report said.
As the recovery gathers pace, the Bank of England should end the period of ultra-low interest rates during the second half of 2010. Rates have stood at 0.5 percent since March 2009 and the central bank has spent 200 billion pounds ($286.1 billion) on an asset-buying scheme to help the economy.
(Editing by Jason Webb)