UK chancellor George Osborne has admitted that he will break a key Conservative election promise by failing to reduce the state's debt. He also warned that growth would be weaker than forecast as he unveiled a bleak economic outlook for Ireland's largest trading partner.
In a budget update to the House of Commons, Mr Osborne said weak growth meant that he would now be a year late in meeting a self-imposed target of reducing debt as a percentage of Britain's national output by 2015-16.
Nevertheless, the chancellor insisted that Britain must stick with its austerity programme, despite economic headwinds from the eurozone debt crisis and weak global growth.
To the jeers of opposition MPs, he said: "Britain is on the right track. Turning back now would be disaster. It is a hard road, but we are getting there."
The British economy is now forecast to grow by only 1.2pc in 2013, significantly less than the 2pc that was predicted in March, Mr Osborne said, citing figures from the independent Office for Budget Responsibility.
The sluggish economy presents a threat to many Irish companies which depend on Britain for their customers. About half of the exports from Ireland's so-called traditional sector – which excludes multinationals – go to the UK.
Britain has two budgets each year – one in the spring, which contains the bulk of tax, benefit and duty changes, and another in the autumn, which tends to focus on updating the forecasts for government finances
This year, that distinction was blurred as Mr Osborne announced several changes to benefits, including a 1pc increase in most working-age benefits for each of the next three years and a smaller cap on pension reliefs – a move that will hurt top earners.
The basic state pension will rise by 2.5pc next year and child benefit will increase by 1pc for each of two years from April 2014.
The main rate of corporation tax will be cut by an extra 1pc to 21pc from April 2014 as the UK continues to position itself as a low-tax country competing with Ireland for foreign direct investment.
Government spending as a share of gross domestic product is predicted to fall from 48pc in 2009-10 to 39.5pc in 2017-18, Mr Osborne said.
Departments must reduce spending by 1pc next year and 2pc year after, he added.
He also announced ultra-fast broadband expansion in 12 cities, including Derry, Cambridge and Oxford, as part of an annual infrastructure investment worth £33bn (€40bn).
Mr Osborne reiterated promises to spend 0.7pc of GDP on development to be honoured next year. The opposition Labour Party accuses Mr Osborne of stubbornly sticking to a failed austerity plan that has choked off growth, sapped demand and eroded much-needed tax revenues.
"Today after two and a half years we can see, and people can feel in the country, the true scale of this government's economic failure," Labour finance spokesman Ed Balls told parliament. Mr Balls asked if the euro zone was such a drag on the UK's recovery, why had the currency area grown faster than Britain.
"It is simply reckless and deeply irresponsible of this Chancellor to plough on with a fiscal plan we all know is failing on the terms he set," he said.
(Additional reporting by Reuters)