David Cameron's Government was yesterday warned over its economic policy just hours after the Prime Minister said the austerity drive could last another eight years.

The International Monetary Fund (IMF) told the Treasury it would have to slow the rate of Budget cuts unless conditions improve.

Conservative Chancellor George Osborne was also urged to consider investing in infrastructure to kick-start growth.

The IMF warning comes days after it slashed its forecast of how much the UK economy would grow this year, to just 0.2%.

The Coalition is under increasing pressure over the economy, which is suffering its second recession in less than five years.

Earlier this week it was announced that the Scottish economy had joined the rest of the UK and had also entered a so-called "double dip" recession.

There was some good economic news this week – including a fall in the jobless total.

However, in an interview on Wednesday the Prime Minister warned that his administration's Budget cuts could continue until 2020, saying that he did not "see a time when difficult spending choices are going to go away."

The IMF said such an approach could restrict rather than encourage economic growth. It also warned that it now believed UK recovery would take longer than earlier predicted.

It is not the first time the IMF has sounded warnings about steps the UK Government is taking.

But Labour said the warning was a significant blow to the Chancellor and claimed the Prime Minister's comments were an admission of failure.

Shadow Chancellor Ed Balls said: "This is a very serious warning to the Chancellor that urgent action to boost jobs and growth is needed."

He added: "The IMF is clear that the Government's economic plan – Plan A – has failed."

Ministers insist that there will be no Plan B. Earlier this week Mr Osborne announced a scheme to provide £50 billion worth of support to major infrastructure projects, but he insisted the move was only possible because of the UK's austerity programme.

Ministers also hope the new scheme will not actually cost the Government any money, as it provides private contractors with guarantees rather than actual funding.

In its judgment, the IMF said a number of its directors "considered that fiscal consolidation should not be accelerated as planned if growth does not build momentum".

The organisation also noted that "persistent weak growth that hinders achievement of fiscal targets might also pose risks to credibility".

Brendan Barber, the general secretary of the TUC union, said: "Today's alarming health check on the UK economy from the Chancellor's favourite economic experts makes it clear that Plan A is not working."

He added: "Continuing along this path could cause permanent damage to the economy."

To add to the Coalition's woes, it was announced yesterday that UK retail sales grew by just 0.3% in the month of June, the lowest figure since October 2009 and well below expectations.

Experts said that the recent bad weather may have deterred shoppers from visiting the high street.

l David Cameron has floated the possibility that his Conservative-LibDem Coalition could break up before the next election.

Observers have speculated that the two parties could end their formal agreement before 2015, in a bid to appeal to electors separately.