George Osborne asks for more... more job cuts, more pain, more borrowing

Chancellor tightens screw on the public sector

George Osborne prolonged Britain's predicted age of austerity to seven years yesterday as he brushed aside criticism that his need to borrow an extra £111bn over the next five years was caused by his own deep spending cuts.

A fanfare of measures to boost growth, announced in the Chancellor's Autumn Statement, was eclipsed by a bleak forecast on growth, jobs and borrowing from the Office for Budget Responsibility. It is the nation's most gloomy outlook since the end of the Second World War. The picture could get much worse if the eurozone debt crisis is not resolved. Mr Osborne admitted Britain could plunge into a double-dip recession if the euro's turmoil continues.

Some analysts detected a partial U-turn or "Plan A plus" in Mr Osborne's £30bn plan to boost spending on infrastructure such as road and rail projects. Privately, ministers admitted many of his measures would take years to make an impact. Insisting that there is no alternative to his Plan A deficit-reduction strategy, the Chancellor said: "We will do whatever it takes to protect Britain from this debt storm."

There was a sting in the tail of his growth plan. Some £5bn will be switched from day-to-day spending to building projects. The savings include a surprise £1bn cut in the planned overseas aid budget over the next three years, even though David Cameron has repeatedly trumpeted his spending on aid. A promised rise in child tax credits for working families was scrapped, saving £2.9m over three years. The small print showed that, despite more help for low-income families with childcare costs, an extra 100,000 children will be pushed into poverty by next year.

There is more pain to come. To reassure the markets, Mr Osborne has extended the squeeze on public spending for two years beyond the next general election in 2015. A two-year freeze on the pay of most public sector workers will be followed by rises of just 1 per cent rather than 2 per cent as planned over the next two years. On the eve of today's strikes, the Chancellor provoked a new confrontation with the trade unions by promising to dismantle their long-standing national pay scales in favour of local rates. The age at which people qualify for the basic state pension will rise to 67 from 2026, 10 years earlier than planned.

Instead of rising in line with inflation, public spending will be cut by 0.9 per cent in real terms after the election. This will mean new cuts of £8.3bn in 2015-16 and £15.1bn in 2016-17.

Mr Cameron's pledge to "balance the books" by the election was blown off course by the OBR's predictions. It cut its March forecast that the economy will grow by 2.5 per cent next year to a figure of 0.7 per cent, which would force a huge hike in borrowing. The OBR said unemployment would rise from 2.6 million to 2.8 million by the end of next year.

Robert Chote, the OBR's chairman, admitted: "The chances of a much worse outcome are much greater than the chances of a much better one." Without the changes announced yesterday, he said, the Government would have missed both of its fiscal targets – to eliminate the structural deficit within five years and to reduce debt as a proportion of gross domestic product by 2015-16.

Labour seized on the OBR figures as the confirmation that Mr Osborne's Plan A had failed. Despite the pain of £40bn of spending cuts and tax rises, Labour claimed, borrowing would be £158bn higher over the next five years than the Government planned a year ago.

Ed Balls, the shadow Chancellor, said: "With prices rising and unemployment soaring families, pensioners and businesses already know it's hurting. And with billions more in borrowing to pay for rising unemployment, today we find out the truth – it's just not working."

But Mr Osborne's aides dismissed Labour's attack. They took refuge in the OBR's analysis that the extra borrowing was not due to the Coalition's spending cuts being "too far, too fast". They insisted it was due to a bigger bust under Labour than previously thought and global conditions. Mr Osborne said Britain would now be "in the centre of the sovereign debt storm" if it had followed Labour's course.

The Liberal Democrats rallied behind Mr Osborne but hailed "wins" during the negotiations on his package. Benefits for the jobless, sick and disabled will rise by 5.2 per cent in April, and Nick Clegg also won more money for childcare for low-income families, a £1bn package to combat youth unemployment and an extra £1bn for his regional growth fund.

Last night Paul Johnson, director of the Institute for Fiscal Studies, said: "Until now we had been thinking of four years of cuts as unprecedented. Six years looks even more extraordinary. We have learnt nothing about where these additional cuts might fall. One presumes Mr Osborne is keeping his fingers crossed that something will turn up which will make such deep cuts unnecessary."

At a glance: The major announcements

Growth

* Forecast for 2011 downgraded to 0.9 per cent from 1.7 per cent

* Forecast for 2012 revised down to 0.7 per cent from 2.5 per cent

* Thereafter: 2.1 per cent (2013), 2.7 per cent (2014), 3 per cent (2015)

Borrowing

* Government to borrow an extra £100bn over four years

* £127bn to be borrowed in 2011-12.

Public sector jobs

* OBR raises forecast for public sector job losses from 400,000 to 710,000

* Pay rises capped at 1 per cent for two years, after current pay-freeze ends next year

* Review into whether salaries should vary locally

Pensions

* Basic state pension will rise by £5.30 next year to £107.45

* State pension age to rise to 67 in 2026 rather than 2036

Business

* Cheap loans worth £40bn for small or medium-sized firms underwritten

* £1bn extra funding for regional regeneration

* £1bn "youth contract" to subsidise 410,000 six-month work placements

* Bank levy to rise in January

Transport

* Cap on regulated rail fares of 6 per cent (inflation plus 1 per cent)

* Fuel duty rise of 3p delayed from January to August

Education and families

* £1.2bn rise in school spending

* 100 extra free schools

* Childcare places doubled to 260,000 for England's poorest two-year-olds

Housing and household

* Mortgage scheme to help 100,000 buy homes with 5 per cent deposit

* £400m to kickstart construction in England

* Half-price discount for social tenants to buy homes in England

* £50 cut in water bills for South-west England

Benefits

* Unemployment benefit to increase by 5.2 per cent, in line with inflation

* Rises in tax credits will be below inflation, apart from disability credit

Infrastructure

* Extra £5bn over three years, including £1bn for rail network

* £20bn to come from pension funds

* Green light for 35 road and rail projects

Overseas aid

* £1bn cut in budget over three years

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