Chancellor says the Office for Budget Responsibility now forecasts a contraction of 0.1% in 2012 but insists that the ‘British economy is healing’
George Osborne has insisted the British economy is “on track” – despite warning that he now plans to extend austerity measures until 2017-18, deep into the next parliament, as weaker-than-expected growth hits the public finances.
Delivering his autumn statement to the House of Commons on Wednesday, the chancellor insisted there were “no quick fixes” for the British economy.
He said the Office for Budget Responsibility was now predicting a contraction of 0.1% in 2012, down from the growth of 0.8% it forecast alongside the chancellor’s March budget.
“It’s taking time but the British economy is healing,” he told MPs. The independent forecasting body also slashed its forecast for GDP growth next year to 1.2%, down from 2%.
Despite the weaker-than-expected outlook, however, the chancellor reaffirmed his determination to press ahead with the coalition’s deficit-cutting strategy, insisting that, “turning back now would be a disaster”.
He said he was wrestling with the consequences of the “decade of debt” at home, as well as the eurozone crisis, and fears of a “fiscal cliff” in the US.
Flat-lining growth has depressed tax revenues, hitting the public finances hard. Osborne said the OBR has judged that he now looks likely to miss his promise that the national debt would be falling by 2015-16. Instead, the OBR believes debt as a share of GDP will now peak at 79.9% in 2015-16, instead of 76.3%, a year earlier, as it predicted in March.
However, the OBR’s assessment does show the government meeting Osborne’s other target, the so-called “fiscal mandate”, of balancing the budget over the next five years. The deficit is expected to fall as a share of GDP over the coming five years, from 6.1% this year, to 1.6% in 2017-18. It was previously expected to be just 1.1% by 2016-17.
“The deficit is still far too high for comfort; we cannot relax our efforts … the road is hard, but we cannot relax our efforts”, he told MPs.
“This government has shown that it is possible to restore sanity to the public finances, while improving the quality of the public services.”
The shadow chancellor, Ed Balls, has blamed the government’s spending cuts for pushing Britain into a double-dip recession by sucking demand out of the economy.
But Osborne said the OBR’s assessment, which will be published in full later on Wednesday, blamed the depth of the 2008-09 recesssion; the slowdown overseas; and the fragile state of the banking sector for the weaker-than-expected growth performance of the economy.
The chancellor set up the independent OBR to ensure that the Treasury could no longer present deliberately optimistic growth forecasts to make the public finances add up.
However, the OBR has repeatedly been forced to revise down its projections, as recession in the eurozone and slowing demand from emerging economies has hit growth. When Osborne delivered his first, “emergency” budget in June 2010, the OBR was expecting growth to be 2.8% this year, and 2.9% in 2013.