Chancellor faces his biggest test as unions fight back

Osborne to offer crumbs of hope to struggling businesses and commuters as he tries to turn the nation's economy around in the face of the mass pension protest

New Year price rises for motorists and train passengers are to be curbed by George Osborne this week as the Chancellor strains to avoid Britain reversing into recession. Tuesday's Autumn Statement will include high-profile pledges to limit rail fare increases to about 6 per cent instead of 8 per cent, while the planned 3p rise in fuel duty will also be delayed, possibly until April. "We need to recognise that things are still really tough for people and do things that make a difference to the money in their pocket," a senior government source said.

However, the measures – in part paid for by a tougher levy on banks – offer slim hope for households braced for grim economic news that will show the recovery has all but stalled. With little sign of an end to the eurozone crisis, unemployment at a 17-year high and Christmas panic on the high street, Mr Osborne faces his biggest test yet to prove he has what it takes to turn the economy around. He will address the House of Commons less than 24 hours before up to two million public sector workers strike over Treasury-imposed changes to their pensions.

The Chancellor will be anxious not to appear to be deviating from his Plan A, but will set out measures aimed at stimulating growth. There will be a multibillion-pound scheme to tackle the seemingly unsolvable problem of how to increase lending to small businesses. The wealthy will also be targeted again. A crackdown on tax evasion and avoidance, revealed in September to The Independent on Sunday by Danny Alexander, the Chief Secretary to the Treasury, is likely to be expanded.

But Mr Osborne has little room for manoeuvre. Growth forecasts will be downgraded again, and economic recovery will seem further away than ever. "The Autumn Statement is not going to be much fun," said one Downing Street source grimly. The OECD is expected to warn that Britain will slip back into recession in the first half of 2012 when it reports tomorrow.

On Tuesday, the Office for Budget Responsibility is expected to say that Mr Osborne's hopes of eradicating the structural deficit a year early, by 2014-15, will be missed. A TUC report yesterday claimed weaker than expected growth would leave the economy about £65bn smaller by 2015.

The Autumn Statement will set out the state of the government accounts, while the parallel growth review will give details of how the Treasury plans to turn the economy around. More help will be targeted at areas outside London and the South-East. Billions of pounds in road, rail and IT projects are expected to be fast-tracked in the hope of creating jobs in the construction industry.

Rail fares are due to rise by 3 per cent above inflation on 1 January but, under a deal agreed by Mr Osborne, the rises on regulated fares will be capped at inflation plus 1 per cent, which will still mean a steep average increase of 6.2 per cent. The measure will cost more than £100m a year. "This is very welcome news," said Stephen Joseph, the chief executive of the Campaign for Better Transport. "But this is only a start – we already have some of the highest commuter fares in Europe and the fares system is confusing and unfair."

Meanwhile, a planned 5.2 per cent increase in benefits will go ahead, one of several decisions that Lib Dems are expected to claim as victories for the less well-off. Nick Clegg has secured £1bn over three years to stop the million unemployed young people in Britain from becoming a lost generation. Lib Dems will also be cheered by news that the levy on banks' balance sheets is to be increased to ensure it raises the planned £2.5bn.

No 10 has insisted the process must not descend into claims of "victories and defeats" and urged a return to the coalition message of "two parties working in the national interest". However, Mr Osborne is under pressure from senior Conservatives to adopt a more radical approach to the economy.

He is expected to unveil a fresh batch of measures designed to be a "game changer" and trigger additional lending to businesses of more than £10bn. A programme of credit easing – where the Government guarantees banks' borrowing on the financial markets to reduce the cost of lending to British firms – would cut interest rates by 1 per cent for small and medium-sized companies with turnover of less than £50m. The package is expected to be up and running by early next year.

However, in a letter to the Chancellor yesterday, Labour's Ed Balls and Chuka Umunna insisted "the effect of this reform will not be felt for years" and warned: "Access to credit will not in itself restore the confidence of business to invest."

A new non-bank fund will also be created to offer long-term loans of about £100m. Government money would be joined in the fund by institutional investors and pension funds to lend to large businesses for between five and 10 years. "We all know that the cost of finance for smaller businesses has risen following the financial crisis," said a Treasury source. "It's a problem people have been trying to solve since 2008, which is why these new schemes are much more radical than anything that has gone before."

How strike by 2.6 million public-sector workers on Wednesday will affect you

Schools

Thousands of schools across the UK are expected to close, as around 760,000 members of NUT, NASUWT and NAHT walk out. The list includes heads, teachers and assistants, dinner ladies and school caretakers. Some schools will remain open with limited teaching.

Airports

A UK Border Agency immigration staff and customs officers strike means immigration checks will be affected. BAA said on Friday that delays at Heathrow could be up to 12 hours. Some planes may be diverted to airports outside the UK. NHS

Thousands of non-urgent hospital operations are expected to be cancelled as up to a million nurses, paramedics, radiographers, midwives, physiotherapists, porters, chiropodists and podiatrists from Unison go on strike. A minority of GPs and hospital doctors will walk out. Agency staff are expected to be called in to cover services.

Local government

Services provided by more than 1.5 million council staff, including refuse collectors, parking wardens, lollipop ladies, cleaners, road sweepers, gravediggers, social workers, care assistants, swimming pool attendants and librarians, will be affected. Closures of libraries and swimming pools are expected, while other services will be disrupted. Commuters in the North-east will face significant disruption as the Tyne & Wear Metro and Shields Ferry cancel all services. There will be no replacement bus service.

Civil servants

As many as 300,000 workers will strike, including probation officers, Jobcentre workers, courts staff, coastguards, tax inspectors, Passport Office staff and driving test examiners. Government offices will close, driving tests will be cancelled and court sittings suspended.

Jane Merrick

Why they are walking out

Katrina Gilman, 34

Evidence reviewer for West Mercia Police

The Government's pension reforms will cost me £100,000. I will also have to work until I'm 68 and in this job it is important that what I do is right: at 68 I'll be less able to do it. The increase in monthly contributions means my partner and I will have to decide whether we can afford breakdown cover for the car, house insurance that covers all our possessions, or Christmas presents for our families.

Paul Redfern, 49

Bricklayer and plasterer

I've worked for 28 years at my local council. I've already paid my bit and I'm at that age when I should be looking forward to my pension. I have a friend who has worked this job for 39 years and he recently retired on only £8,000 a year. Today, I was plastering a ceiling on my own. At 68, there's no way I could do that. I've got a kid in university and I'm scared that I won't be able to support him soon.

Cathy Roblin, 54

Social worker, Southampton

I am already losing £100 a month because of pay cuts introduced by the council. The Government's pension proposals will mean I'll be nearly £200 a month worse off. I feel strongly about how these proposals will affect women, and in particular single women. I am a single mum, so my pension is all I have to rely on in old age. If the Government wants to keep women healthy and independent in retirement, it needs to give us a decent pension.

Mohammad Akbar, 51

Technician for the London Ambulance service

I have been in the ambulance service for over 20 years and paying into my pension on the basis that I will retire at 65. Now the Government wants us to pay more in and work for longer. People who retire over 65 die sooner than those who retire earlier. This work is really tough. We have to carry people: it isn't right that a 68-year-old should be expected to do that.

Lucy Johnson, 24

History teacher at a secondary school

The hard work and dedication that goes into becoming a teacher – and the costs of that dedication – won't be paid off if we don't take action. One of the best perks about becoming a teacher was that we would have a reliable and dependable pension. We have already gone through so much to get to where we are. If you look at doctors, for example, we don't earn as much as them but we are just as important.

Interviews: Oliver Poznowski and Stephen Bowron

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