IMF accepts it was wrong on George Osborne's austerity

“I couldn’t have put it better myself,” said a triumphant Mr Osborne who declared that the British economy was “firing on all cylinders”.

But Ms Lagarde warned there was “no room for complacency”. She said the UK economy faced risks from an over-heated housing market as well as low productivity. She called for “targeted and timely” action on the property market, including imposing limits on mortgages relative to incomes and caps on loan-to-value ratios too.

The IMF added that the Government should consider whether its flagship Help to Buy scheme “should be modified or even remains necessary for the full three years of the policy.”

The fund also recommended more changes to the UK’s planning rules. It said the Government should “reconsider unnecessary constraints on brownfield and greenfield developments; tax policies that discourage the most economically-efficient use of property; and underdeveloped rental markets with relatively short lease terms.”

Mr Osborne said he “agreed” with the IMF’s warnings on the property market. He said the UK would “remain vigilant” for any risks that might emerge from the housing market. He said the Bank of England had the “tools” to intervene if it saw a “risk to stability”. “I’ve made it clear that means recommendations to me on the parameters to the Help to Buy scheme,” he said.

Ms Lagarde also argued that the UK’s export levels needed boosting. She said she would “slightly qualify” Mr Osborne’s assessment that the economy is “firing on all cylinders.” “I would say the export cylinder is the one that could fire a little more strongly. It’s relatively subdued relative to the opportunity,” she said.

The IMF warned that global turbulence also posed a risk. “Externally, the relative calm in global financial markets could be disrupted by the response of the unwinding of unconventional monetary policy, particularly in the US; the re-emergence of stress in the euro-area; or the sharp slow down in emerging economies,” said Ms Lagarde.

However she added: “While the recovery was first dependent predominantly on consumption, there are now signs that the economy is now rebalancing towards an investment-led economy which obviously bodes well for the sustainability for the recovery.”

Ms Lagarde also noted that the UK had “made good progress in strengthening the resilience of its banks and financial sectors” through the Coalition’s new regulatory architecture.

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