Britain's economy will stagnate until mid-2012 and could easily fall back into recession, the government said on Tuesday, a grim outlook that puts its debt reduction plans in jeopardy and will mean more austerity for longer.
Finance Minister George Osborne, unveiling much lower growth and higher borrowing forecasts than outlined in March, said the Conservative-Liberal Democrat coalition government's deficit plan was still broadly on track but he had lost a one-year cushion factored in to the strategy.
In one of his two major annual parliamentary setpieces, Osborne warned the British economy risked getting dragged into recession if the eurozone debt crisis was not solved. But he said he would not deviate from hefty spending cuts outlined last year in order to protect Britain's top-notch credit rating, despite calls from economists, unions and opposition politicians for more of a focus on boosting growth. "If the rest of Europe heads into recession it may prove hard to avoid one here in the UK," he told parliament.
"Much of Europe appears to be heading into recession caused by a chronic lack of confidence in the ability of countries to deal with their debts." Osborne said the eurozone crisis meant getting the public finances in order was the only way to build solid foundations for future growth but markets may now doubt whether Britain can deliver on its fiscal promises and the opposition Labour party said his plans were in tatters.
The economy was now forecast to grow by only 0.7 percent next year, way below a March budget forecast of 2.5 percent, Osborne said, presenting figures from the independent Office for Budget Responsibility. The OBR expects the economy to shrink by 0.1 percent in the last three months of this year and then grow by just 0.1 percent in the next two quarters.
Among a raft of measures announced alongside the forecasts, Osborne said pay rises for public sector workers would be capped at one percent once a two-year pay freeze ends in 2013. Public sector job losses will rise to 710,000 from an original estimate of around 400,000.
That will fuel anger among unions on the eve of a one-day strike by 2 million public sector workers over cuts by the Conservative-led coalition that will make them pay more and work longer for their pensions. Growth was expected to recover to 2.1 percent in 2013, down from a previous foreast of 2.9 percent, before accelerating to 3.0 percent by 2015 - a rate which analysts said was optimistic.
Britain's public sector borrowing will hit 120 billion pounds in 2012/13, up from 100 billion pounds forecast in the March budget. Borrowing will come in at 79 billion pounds in 2014/15, up from a previous forecast of 46 billion pounds. The OECD rich nations' economic think-tank said on Monday that Britain will slip back into a modest recession early next year. It lowered its 2012 growth forecast to just 0.5 percent and urged the Bank of England to expand its money-printing programme.
The yield on 10-year gilts has been trading at 2.3 percent, well below the 3.8 percent average rate projected by the OBR in March, resulting in a total debt interest saving of 22 billion pounds up to 2015/16, Osborne said. The Bank of England will pump an additional 75 billion pounds into the economy in coming months, a Reuters poll indicated on Tuesday, taking the total to 350 billion as it tries to revitalise growth.