The International Monetary Fund (IMF) has said the UK economy is "on the mend" and has backed the coalition government's plans to cut spending.

The IMF described the deficit reduction plan as "essential" in supporting the UK's debt position, and said it "supported a balanced recovery".

The body also said that the UK economy would continue to recover at a moderate pace while the cuts were implemented.

The IMF predicted growth of 2% in 2011, rising to 2.5% in the medium term.

That marks a small revision downwards from an earlier forecast of 2.1% growth in 2011.

"Economic recovery is underway, unemployment has stabilised and financial sector health has improved," the IMF said.

In the public relations battle over the deficit, Mr Osborne's team has won an important, and surprisingly unqualified, endorsement Stephanie Flanders, BBC economics editor Stephanomics: IMF gives thumbs up

It acknowledged that the spending cuts designed to reduce the government's budget deficit would hit growth, but it said that the economy would continue to recover.

"Fiscal tightening will dampen short-term growth but not stop it as other sectors of the economy emerge as drivers of recovery, supported by continued monetary stimulus."

It also said companies were starting to increase investment as "the demand outlook strengthens".

Consumers, it added, would remain "thriftier" than they were before the financial crisis, but would be in a position to "gradually raise their consumption as labour markets recover".

The body also forecast that inflation would fall back below the target rate of 2% by early 2012.

The rise in VAT to 20% in January would ensure that inflation remains above target next year, it said.

Reacting to the report, Chancellor George Osborne said the IMF's support showed the government had "won the argument" on deficit reduction.

"It's a welcome endorsement of [our deficit reduction plan]," he said in an interview with the BBC.

'Downside risks'

"The IMF has joined us, the Bank of England and the Confederation of British Industry in saying that what we are doing is right."

"It also reminds us that if we divert from the course that the new government has set out, then we will be heading back into a disastrous period of economic instability for Britain, and I'm determined that we don't turn back."

Despite the upbeat assessment of the UK economy and the government's plans to cut the deficit, the IMF warned that "downside risks are also sizeable".

These risks, it said, included continued fragile confidence, weakness in the housing market and a greater impact than expected from spending cuts.

"Another extended contraction in output cannot be ruled out," it said.

That reflected the argument made by Labour politicians that the speed and depth of the government's planned cuts would put the UK's economic recovery at unnecessary risk.

Ed Miliband, the newly-elected Labour leader, has called the previous government's plan to cut the deficit by half over four years "a starting point".