Spending cuts will curb government consumption, investment and household income growth over the 2011-12 period, but will bring long-term gain. The OECD says that pushing through key reforms will address fiscal sustainability concerns and help bring about a long-term rebalancing of the UK economy.

“By taking hard, though necessary, decisions now, the UK is ensuring that it can continue to provide the British people with effective government services in the future,” OECD Secretary-General Angel Gurría said during the survey’s release in London. “To counter some of the negative impact, monetary policy should remain expansionary to support the recovery, even if headline inflation is currently above target.”

Fiscal consolidation should be adjusted to better support growth. Economic recovery and job creation would both benefit from smaller-than-planned cuts in public investment. Such reforms should be financed through improvements to the efficiency of Value Added Tax, including ending exemptions and bringing lowered rates up.

The UK VAT system is one of the least efficient in the OECD area, with less than 60% of potential revenues actually collected. Targeted support should be introduced to compensate poorer households for VAT increases. Combining these measures would support the recovery, enhance efficiency and protect the weakest without harming consolidation.

Unemployment is expected to remain above historical averages over the coming two years, with low-skilled workers and youth particularly hard hit. The survey points to the importance of maintaining efficient employment services for helping the unemployed find jobs. Additionally, education reforms could improve skills, support social mobility and boost long-term growth.

Reforms to housing policy - such as those that enhance the supply of available land and reduce the volatility of demand - could increase affordability and curb the price swings that have plagued the UK housing market.

To meet the UK's ambitious climate change targets and continue to reduce CO2 emissions, the survey recommends higher and more consistent carbon prices and more predictable conditions for renewable energy providers.