Britons must tighten belts to avoid recession – George Osborne
Published 29/11/2011 | 14:20
BRITAIN must demonstrate that it is able "to live within its means" if it is to avoid slipping back into recession, Chancellor George Osborne said today.
He said growth forecasts from the Office of Budget Responsibility showed that, while a double-dip recession could be avoided, it depended on the survival of the eurozone.
Mr Osborne told the Commons that the Government "would do whatever it takes to protect Britain from this debt storm" in Europe, while at the same time "building the foundations for growth".
Mr Osborne said: "Much of Europe is heading into a recession caused by chronic lack of confidence of countries to deal with their debt.
"We will do whatever it takes to protect Britain from this debt storm while doing all we can to build the foundations of future growth.
"Today we set out how we will do that by demonstrating that this country has the will to live within its means and keep interest rates low.
"By acting to stimulate the supply of money and credit to make sure those low interest rates are passed on to families and businesses, by matching our determination on the deficit with an active enterprise policy for business and with lasting investment in our infrastructure and education so that Britain can pay its way in the future.
"And at every opportunity helping families with the cost of living."
"The OBR cites the chilling affects of the current instability as one of the central reasons for the reduction in their growth forecasts," the Chancellor said.
"Their forecasts today demonstrate beyond any doubt their independence.
"But if we accept their numbers... we must also pay heed to their analysis.
"In addition to the eurozone crisis, the OBR gives two further reasons for the weaker forecasts.
"First, what they call the 'external OBR inflation shock' - the result, in their words, of unexpected rises in energy prices and global, agricultural, commodity prices.
"Their analysis - independent - is that this explains the slowdown in growth in Britain over the past 18 months.
"Second, the OBR has today shown new evidence that an even bigger component of the growth that preceded the financial crisis was an unsustainable boom, that the bust was deeper and had an even greater impact on our economy than previously thought.
"The result of this analysis is that the OBR have significantly reduced their assumptions about spare cash in our economy and the rate of growth.
"This increases their estimate of the proportion of the deficit that is structural; in other words, the part of the deficit that doesn't disappear even when the economy recovers.
"So our debt challenge is even greater than we thought because the boom was even bigger, the bust even deeper and the effects will last even longer."
Mr Osborne said he wanted to protect those who could not work because of disabilities or they had lost their jobs.
Working-age benefits would be upgraded in line with the Consumer Price Index inflation index, he said, providing a "significant boost to the incomes of the poorest".
He added the Government would also increase the child element of the child tax credit by £125 (€146) but other elements of the working tax credit will not be uprated.
Mr Osborne added: "The best way to support low-income working people is to take them out of tax altogether and our increases in the income tax personal allowance this year and next will do that for one million people."
Mr Osborne said Britain had the highest deficit in its history outside of war and it was "left by the last government to this Government to sort out".
He said: "This feeds directly through into borrowing numbers that are falling, but not at the rate that had been forecast."
Mr Osborne said that borrowing in the 2009/10 year had been £156bn, falling to £137bn in the first year of the Government.
He said the OBR was calculating borrowing at £127bn this year, £120bn in 2012/13, £100bn on 2012/14, £79bn in 2014/15, £53bn in 2015/16 and £24bn in 2016/17.
And he told MPs: "Because of the lower market interest rates, debt interest payments over the Parliament are forecast to be £22bn less than budgeted.
"The House might also like to know, given the economic events described by the OBR, what would have happened to borrowing without the actions this Government has taken. The Treasury today estimates that by 2014/15 it would have been running at well over £100 billion per year more."
Mr Osborne said the crisis in the eurozone does not undermine the case for the measures he has taken but made them, because otherwise Britain would be "in the centre of the sovereign debt storm".
And the Chancellor also said he would hit targets to get debt falling as a proportion of national income by the end of the Parliament - but the headroom was gone.
He said: "But I am clear our rules must be adhered to and I am taking action to ensure that they are. As a result, the OBR central projection is we will meet both the fiscal mandate and the debt target."
He said the current structural deficit is forecast to fall from 4.6pc of GDP this year to 0.5pc in five years' time. He said the debt-to-GDP ratio at 6.7pc this year would increase to 7.8pc in 2014/15 before falling.
Mr Osborne said the notion of spending more and borrowing less was "something for nothing economics".
Last April, he said, the absence of a credible deficit plan meant the country's credit rating was on negative outlook and the market interest rates were higher than Italy's.
Eighteen months later, Britain was the only major western country which had had its credit rating improved.
Italy's interests rates were now 7.2pc and Britain's were less than 2.5pc.
"Just a 1pc rise in our market interests rates would add £10bn to mortgage bills every year," he said, adding: "We will not take this risk with the solvency of the British economy.."
He said the measures set out require no extra borrowing and provide no extra savings across the whole spending review period.
He said: "I am announcing significant savings in current spending to make the fiscal position more sustainable in the medium and long term.
"In the short term over the next three years, we will use these savings to fund capital investments in infrastructure, regional growth and education, as well as help for young people to find work."
He said the Government would set public sector pay awards at an average of 1pc in each of the two years after the pay freeze.
He said: "While I accept that a 1pc average rise is tough it is also fair to those who work to pay the taxes that will fund it."