By William Schomberg and David Milliken
LONDON (Reuters) - The International Monetary Fund called on Britain's government on Wednesday to do more to speed up slow economic recovery, hinting that the country might be able to afford to borrow more to fund investment.
The report is unlikely to spur chancellor George Osborne to deviate from his flagship austerity programme, and does not directly urge him to defer planned spending cuts.
The IMF expressed concern that a new government programme to boost the housing sector might simply push up prices and called for a "clear strategy" on returning state-controlled Royal Bank of Scotland and Lloyds Banking Group to private ownership.
In an annual review of Britain's economic policies, the Fund said Britain had shown "welcome flexibility" in its push to fix one of the biggest budget deficits in the European Union and noted "encouraging" signs that the economy was on the mend.
"The UK is, however, still a long way from a strong and sustainable recovery. Per capita income remains 6 percent below its pre-crisis peak, making this the weakest recovery in recent history," it said.
It said "planned fiscal tightening will be a drag on growth" and called for several measures to bring about a speedier recovery that would help fix the deficit, urging Britain to take advantage of low borrowing costs to fund more investment.
"Given the tepid recovery, policy should capitalize on nascent signs of recovery to bolster growth, notably by pursuing measures that address supply-side constraints and also provide near-term support for the economy," the IMF said in a statement.
"In the current context in which labour is under-utilized and funding costs are cheap, the net returns from such measures are likely to be particularly favourable."
Osborne has long said that making a conscious choice to borrow more than planned - rather than just reacting to a weaker economic environment - would damage Britain's credibility with the financial markets that fund Britain's debt.
On Tuesday, a spokesman for Prime Minister David Cameron said the government was on track to return the economy to health, and Osborne has previously said he would not take on board IMF recommendations that he disagreed with.
(Editing by Catherine Evans)