By William Schomberg and David Milliken
LONDON, May 22 (Reuters) - The International Monetary Fundcalled on Britain's government on Wednesday to do more to speedup slow economic recovery, hinting that the country might beable to afford to borrow more to fund investment.
The report is unlikely to spur finance minister GeorgeOsborne to deviate from his flagship austerity programme, anddoes not directly urge him to defer planned spending cuts.
The IMF expressed concern that a new government programme toboost the housing sector might simply push up prices and calledfor a "clear strategy" on returning state-controlled Royal Bankof Scotland and Lloyds Banking Group to privateownership.
In an annual review of Britain's economic policies, the Fundsaid Britain had shown "welcome flexibility" in its push to fixone of the biggest budget deficits in the European Union andnoted "encouraging" signs that the economy was on the mend.
"The UK is, however, still a long way from a strong andsustainable recovery. Per capita income remains 6 percent belowits pre-crisis peak, making this the weakest recovery in recenthistory," it said.
It said "planned fiscal tightening will be a drag on growth"and called for several measures to bring about a speedierrecovery that would help fix the deficit, urging Britain to takeadvantage of low borrowing costs to fund more investment.
"Given the tepid recovery, policy should capitalize onnascent signs of recovery to bolster growth, notably by pursuingmeasures that address supply-side constraints and also providenear-term support for the economy," the IMF said in a statement.
"In the current context in which labor is under-utilized andfunding costs are cheap, the net returns from such measures arelikely to be particularly favorable."
Osborne has long said that making a conscious choice toborrow more than planned - rather than just reacting to a weakereconomic environment - would damage Britain's credibility withthe financial markets that fund Britain's debt.
On Tuesday, a spokesman for Prime Minister David Cameronsaid the government was on track to return the economy tohealth, and Osborne has previously said he would not take onboard IMF recommendations that he disagreed with.
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