The coalition is preparing a significant boost in state-backed infrastructure investment in a fresh push on growth, the Deputy Prime Minister has indicated.
Nick Clegg said instructions had been issued to the Treasury setting out the Government's plan to use its balance sheet to underwrite major projects such as housing. It comes as the International Monetary Fund urged the UK to look at fuelling infrastructure funding or cutting VAT or National Insurance if the economic situation worsened.
In an interview with the Financial Times, Mr Clegg denied the shift in focus was "plan B". He conceded the coalition's stark economic warnings could have a "dampening effect", telling the newspaper ministers had initially had no choice but to set out "in very lurid terms the state of the emergency we were facing".
"That kind of language over a prolonged period of time can have a dampening effect on mood, which is very important in an economy," he added.
Mr Clegg admitted the use of state balance sheets to assume additional risks on major schemes was not popular with all. "From the top of government, a few weeks ago we decided this was the route we're going to take," he added. "That's the instruction we've issued to the Treasury."
In its annual report on the state of the UK economy, the IMF said that deficit reduction was "essential" in the medium term and paid tribute to the "substantial progress" towards a sustainable budget delivered by the coalition Government's austerity programme.
"When I think back to May 2010, when the UK deficit was at 11%, and I try to imagine what the situation would be like today if no such fiscal consolidation programme had been decided, I shiver," said IMF managing director Christine Lagarde.
Mr Cameron's official spokesman said Mr Clegg's comments reflected conversations that had been taking place within Government and which the Prime Minister touched on in a speech last week.
"The Prime Minister discussed in his speech last week this issue of what the Government can do, how the Government can use its balance sheet to support investment - in housing, investment in business, investment in infrastructure," said the spokesman. "As he said in that speech, he has asked the Treasury to examine what more we can do in that area. That work is now under way."
Labour Treasury spokeswoman Rachel Reeves said: "People will take Nick Clegg's warm words about boosting growth with a huge pinch of salt. We've heard promises about infrastructure investment time and time again, but nothing has happened."