The west's leading economic thinktank yesterday backed George Osborne's spending cuts as Brussels conceded that half a dozen debt-ridden EU countries should be given up to two extra years to reduce their budget overspends.

In its half-yearly forecast, the Paris-based Organisation for Economic Co-operation and Development (OECD) said the UK was on the right path to a more balanced budget, despite warning that cuts and low consumer and business confidence would put a brake on growth.

It said the economy would grow by 1.5% in 2014, down from its previous forecast of a stronger 1.6% increase.

"The muted global recovery, especially in Europe, and the necessary adjustment of still-impaired public and private sector balance sheets continue to weigh on growth," the thinktank said in its much anticipated economic forecast.

The OECD, which has 34 rich country members, added that despite a resilient labour market, UK consumer spending was being held back by weak real earnings, fragile confidence and the determination of householders to cut their debts.

Private investment was also restrained by weak demand and "high uncertainty", it said.

But it backed George Osborne's plans for further spending cuts, saying: "With a high budget deficit and gross government debt rising to 90% of GDP in 2012, further fiscal consolidation is necessary to restore the sustainability of public finances."

The European Commission, which is also keen to force national governments to reduce their debts, said Spain, France, Portugal, Poland, the Netherlands and Slovenia can take up to two extra years to lower their deficits. Intense lobbying persuaded Brussels that previous deficit reduction plans would be self-defeating and lead to lower growth and tax receipts, and in turn higher debts.

However, several analysts argued that Brussels had made only a tactical retreat and countries would be forced to press ahead with many of the same spending cuts.

The Open Europe thinktank said: "For all the talk of this being the 'end of austerity' or 'austerity in retreat', is much really changing? Sure, there is some tinkering with timelines for deficit reduction, but ultimately the eurozone is still going along the same policy path - just slightly more slowly."

The OECD highlighted concerns that the euro will remain a danger for the world economy if policy decisions prolong the current recession.

Pier Carlo Padoan, OECD chief economist, said: "In the euro area, still-rising unemployment is the most pressing challenge for policymakers. Protracted weakness could evolve into stagnation with negative implications for the global economy." This, he said, would raise the spectre of further weakening banks, higher government borrowing and the threat of a country being forced to leave the single currency.

Throughout the euro crisis the European Central Bank (ECB) has resisted following the unconventional monetary policies pursued by the Bank of England, the US Federal Reserve and more recently the Bank of Japan, preferring to act as an insurer of last resort to debt-ridden eurozone nations. But the OECD urged the ECB to cut interest rates further and take a more active role in supporting an increase in lending to businesses.

Even without a change of heart at the ECB's Frankfurt offices, the eurozone will begin to exit its recession in the second half of the year, the OECD said, though several countries including Italy and Spain will still be contracting into 2014.

It sees Spain's economy shrinking a further 1.7% this year, while growth of just 0.4 percent in 2014 will not create jobs. Its deficit will barely shift next year, with a drop from 7% of GDP in 2012, not including the cost of bailing out its banks, to 6.9%, while unemployment is set to rise to 28%.

Italy is forecast to grow in 2014, but by less than 1%. The OECD had little better news for France, which has seen its economy flatline for two years and its new socialist government focus more on reducing debt than creating jobs. The OECD welcomed this stance, recommending that Paris allow welfare benefits to support those who are thrown out of work as public sector cuts bite.

The thinktank said Britain needed to make strides to increase investment and especially to improve infrastructure spending and housebuilding to spur jobs growth. It warned there could be another house price bubble without a building programme.

Chris Leslie MP, Labour's shadow financial secretary to the Treasury, said the OECD joined a long list of organisations to say that the government needs to increase the number of homes being built.

"After the IMF's damning criticism last week the government must act to build the affordable homes we need to kickstart the economy, tackle the housing crisis and strengthen our economy for the long term. And they must tackle the youth unemployment crisis with a compulsory jobs guarantee for every young person out of work for over a year, funded by a tax on bank bonuses," he said.

The slow recovery in Britain and the eurozone contrasted with the forecast for the US, which is expected to reach almost 3% growth next year. The OECD heaped praise on Washington's successful recapitalisation of its banks, which allowed the banking system to get back on its feet and kickstart lending to households and businesses.

Unemployment in the US is forecast to fall from its current 7.5% level and its budget deficit to decrease steadily while the UK unemployment rate is predicted to remain stuck on 8% and its deficit to fall only slowly.

Nevertheless, the picture for the UK is mildly better than six months ago, when, in the depths of the euro crisis, the OECD said unemployment would rise to 8.3% this year.

Padoan, who urged countries to co-operate to facilitate growth, said: "While still disappointing, the global economy is moving forward, and it is doing so at multiple speeds. These multiple speeds reflect different paths towards self-sustained growth, with each path carrying its own mix of risks."

He criticised moves by the US Congress to impose public spending cuts, known as the sequester, before the recovery is entrenched, which it said would limit the country's growth spurt, but praised the longer-term path of government policy.

"In the United States, the combination of a repaired financial system and a revival in confidence is driving growth. Private sector demand is stabilising as household deleveraging is far advanced, house prices are rebounding and wealth accumulation is supporting consumption. Employment is growing, adding to confidence."

The OECD as a whole is expected to grow by just 1.2% in 2013 and 2.3% in 2014, with unemployment falling from 8.1% to 8% over the two-year period.