THE UK 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.
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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 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 £156 billion, falling to £137 billion in the first year of the Government. He said the OBR was calculating borrowing at £127 billion this year, £120 billion in 2012/13, £100 billion on 2012/14, £79 billion in 2014/15, £53 billion in 2015/16 and £24 billion in 2016/17.
And he told MPs: “Because of the lower market interest rates, debt interest payments over the Parliament are forecast to be £22 billion 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 4.6% of GDP this year to 0.5% in five years’ time. He said the debt-to-GDP ratio at 6.7% this year would increase to 7.8% 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 7.2% and Britain’s were less than 2.5%.
“Just a 1% rise in our market interests rates would add £10 billion 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 1% in each of the two years after the pay freeze.
He said: “While I accept that a 1% average rise is tough it is also fair to those who work to pay the taxes that will fund it.”
Mr Osborne said the “most important thing was to get credit flowing to British businesses” by keeping interest rates low.
On housing, he said the Government would be underwriting mortgages for 100,000 young families trying to get on the property ladder, while unlocking a £400 million fund to kickstart projects that had fallen by the wayside.
Ministers would also re-invigorate right-to-buy, which he described as one of the “greatest social policies of all time” as it brought home ownership within the grasp of millions of families but it had been “slowly and stealthily strangled” by the last government. Families would now be offered discounts of up to 50%, he said.
Mr Osborne said the economy had become “dangerously over-reliant” on the City in the years leading up to the crash. While the financial services sector had boomed, industry in areas such as the West Midlands had fallen away, he said.
“By 2007, the previous government was relying on banks for one in every eight pounds it raised in taxation,” Mr Osborne said. “That left Britain completely exposed when the banks failed and I confirm from next month we will publish our response to the report we commissioned from Sir John Vickers to protect taxpayers’ debt.”
He insisted the Government backed the City as a leading global financial centre. It would oppose the EU financial transactions tax, which he described as a “tax on pensions”.
But the Government needed to increase the bank levy to 0.088% if it wished to continue to raise £2.5 billion from the tax from January 1.
Large firms would no longer be able to use complex asset-backed pension funding arrangements to claim double the amount of tax relief that was intended.
Mr Osborne set out spending levels for the two years following the end of the spending review period 2015-16 and 2016-17 - the two years following the next general election due in May 2015.
He told MPs: “Total managed expenditure will fall during that period by 0.9% a year in real terms - the same rate as set out in the existing period of the spending review with a base line that excludes the additional investment in infrastructure also announced today.
“These are large savings and we will set out in future how resources will be allocated between different areas of Government.”
Mr Osborne went on to announce “a measure to control spending which is not for today, not for next year or even for the next decade”.
He said: “It directly addresses the long-term challenge Britain and so many other countries face with an ageing population.
“Our generation has been warned the cost of providing decent state pensions are going to become more and more unaffordable unless we take further action.
“Let’s not leave it to our children to take emergency action to rescue the public finances.
“Let’s think ahead and take responsible, sensible steps now.”
He said that in 2026 the state pension age would rise from 66 to 67, “so we can go on paying a decent pension for people who are living longer”.
He said nations including Australia, Germany and the US had taken similar decisions.
Mr Osborne said the decision would not affect anyone due to begin claiming their state pension within 14 years - saving taxpayers a “staggering” £59 billion.
He added: “It will mean a long-term future for the basic state pension.
“We are showing a world sceptical that democratic Western governments can take tough decision that Britain will pay its way in the world.”
He said the Government aimed to keep the UK’s interest rates low and protect Britain from the debt storm.
He added: “We need to make sure these interest rates are available to families and businesses to stimulate demand.”
The Chancellor said he had authorised an increase on the ceiling of the Bank of England’s asset purchasing to £275 billion to allow more quantitative easing, commonly dubbed “printing money”.
He said: “This will support demand across the economy.
“We must do more to help those small businesses which can’t get access to credit at an affordable price.”
He unveiled £40 billion of credit easing to help firms receive loans.
“We are launching our National Loan Guarantee scheme,” said Mr Osborne, who began speaking at 12.31pm.
“It will work on the simple principle that we use the hard-won low interest rates the Government can borrow at to reduce the interest rate that small businesses can borrow at.
“New loans and overdrafts to businesses with a turnover of less than £50 million will be eligible for the scheme so it stays focused on smaller companies.
“We expect it will lead to reductions of 1% in the rate of interest charged to these companies, so a business facing a 7% interest rate with a £5 million loan could instead see their rate reduced to 6% and their interest costs fall by up to £50,000.”
He said Treasury officials would work with the Bank of England to allocate funding to different banks “based on how much they increase both net and gross lending to firms”.
He added: “There will be a clear audit trail to ensure banks comply.”
OSBORNE CANCELS FUEL DUTY HIKE
Drivers enduring high petrol prices were given some respite by Chancellor George Osborne today.
He announced that the 3p fuel duty increase planned for January 2012 would be cancelled, while the 5p hike due in August 2012 would be only 3p higher than prices now.
Mr Osborne said millions used cars to go to work and to pick up children from school and for most people their vehicle was not a luxury but a necessity.
Having cut fuel duty by 1p in this year’s Budget, Mr Osborne said that families would be saving £144 on filling up the average family car by the end of next year.
AA president Edmund King said: “The Chancellor has seen sense on this vital issue. Cash-strapped drivers will heave a heavy duty sigh of relief as current pump prices are close to the record high.
“This measure will not only be a relief to drivers but also to the high street as drivers have less to spend if more money is pumped into their tanks. It is still tough on the streets for many drivers but at least the Chancellor hasn’t added to their pain. As the AA has been saying he understands that cars are a necessity and not a luxury.”