Committee says budget raised chance of recession

Chancellor George Osborne, arrives to speak at a news conference at the Treasury, in central London July 20, 2010.

LONDON (Reuters) - Chancellor George Osborne's austere emergency budget last month has raised the probability of renewed recession in the short term, a cross-party legislative committee said on Tuesday.

MPs on the Commons' Treasury Committee also leaned on Osborne to rein back fiscal tightening if the economy does worsen by offering an interpretation of his remarks at odds with that of some other observers.

"The Chancellor told us that he had built a degree of caution into the fiscal mandate by seeking to achieve it a year early," the report said.

"We welcome this as a signal that if economic conditions demand it he may be prepared to take measures to stimulate the economy, even if these delay the current plans for cutting the deficit," the report concluded.

Osborne told the committee that monetary policy was a more powerful tool to support the economy than fiscal policy, and that the "degree of caution" was aimed at giving extra certainty to the achievement of the fiscal targets.

The committee said forecasts from the quasi-independent Office for Budget Responsibility published before and after the June 22 budget, showed a higher risk of recession, despite being hard to compare because of different underlying assumptions.

"It appears that there has been a slight increase in the chance of near-term negative growth and an increased likelihood of positive growth in the outer years," the lower house of parliament's treasury committee said in a report.

Osborne's budget plans aim to eliminate Britain's structural budget deficit within the next five years, with most government departments facing spending cuts of at least 25 percent.

(Reporting by David Milliken; editing by Stephen Nisbet)