GEORGE Osborne was forced today to acknowledge a grim picture of declining growth and rising unemployment for the UK in the years to come.
The Chancellor insisted he will still meet his key target of eliminating the UK’s structural deficit by 2015/16.
But his Labour shadow Ed Balls said the economy was flatlining and had suffered “all of the pain and none of the gain” at the Government’s hands.
The Office for Budget Responsibility forecasts announced in today’s Autumn Statement predict growth at 0.9% for this year and 0.7% for 2012 - sharply downgraded from 1.7% and 2.5% in the OBR’s last forecasts at the time of the March Budget.
Growth is then expected to pick up to 2.1% in 2013, 2.7% in 2014, and 3% in 2015 and 2016.
The OBR also said unemployment will increase from 8.1% this year to 8.7% in 2012 before falling back to 6.2% by 2016.
Mr Osborne announced a package of growth measures intended to boost GDP by encouraging investment in infrastructure, small companies and the regions and getting young people into work.
But he had few high-profile goodies for ordinary voters, simply confirming widely trailed reports that he would hold rail fare increases down to inflation plus 1% and cancel a planned 3p rise in fuel duty, as well as providing free nursery care for 260,000 two-year-olds.
Pensioners will see a £5.30-a-week boost to £107.45 in their basic state pension and work-related benefits will be uprated in line with the unusually-high CPI inflation rate of 5.2% recorded in September.
But some of the money will be clawed back by holding down increases in elements of the tax credit system.
Public sector workers were told that annual pay rises will be limited to 1% for two years after their current pay freeze ends.
And Mr Osborne announced that the pension age will be raised to 67 from 2026.
The Chancellor told MPs that his statement offered “leadership for tough times”, rather than “promises of quick fixes and more spending that this country can’t afford at times like this”.
But Mr Balls said that the OBR figures showed the economy flatlining to the extent that borrowing would be higher at the end of the Parliament than it would have been under Labour’s plans.
Mr Osborne’s austerity agenda had been “entirely counter-productive and self-defeating”, said the shadow chancellor, adding: “It’s back-fired. We have had all of the pain and none of the gain.
Mr Osborne had a blunt message for unions preparing to strike over reforms to public sector pensions tomorrow.
Insisting that the Government’s offer on pensions was “fair”, the Chancellor told the unions: “Call off the strikes tomorrow. Come back to the table. Complete the negotiations and let’s agree generous pensions that are affordable to the taxpayer.”
Delivering his keenly-awaited statement to MPs, Mr Osborne said that the OBR blamed lower-than-expected growth on the sovereign debt crisis in the eurozone.
And the Chancellor told MPs: “Much of Europe now appears to be heading into a recession caused by a chronic lack of confidence in the ability of countries to deal with their debts.
“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.”
The Chancellor said the OBR’s figures did not forecast recession for the UK - unlike yesterday’s analysis from the Organisation for Economic Co-operation and Development, which predicted a period of negative growth in the final quarter of 2011 and the first quarter of 2012.
But the OBR found that the debt challenge was “even greater than we thought because the boom was even bigger, the bust even deeper and the effects will last even longer”, said Mr Osborne.
Their analysis showed the proportion of the deficit that was structural was greater than anticipated.
Borrowing was falling “but not at the rate that had been forecast”, said Mr Osborne.
He said the OBR expected it to be £127 billion this year - falling to £24 billion a year by 2016/17.
Lower market interest rates meant repayments would be £22 billion less than predicted over the course of the parliament, he said.
Treasury estimates suggested that, under Labour’s plans, the UK would have had to borrow an additional £100 billion - putting the UK “at the centre of the sovereign debt storm”, he said.
Mr Osborne said the measures announced today would be revenue-neutral, neither adding to borrowing nor producing extra savings.
Additional spending on infrastructure will be paid for by cuts in current day-to-day expenditure to avoid driving the deficit back up, he said.
Alongside a £40 billion “credit easing” scheme to get money into small businesses, he outlined £5 billion of infrastructure projects to be given the go-ahead straight away.
Help for families needing housing would also include a “reinvigorated” right to buy with discounts of up to 50% available for council house sales - with the money used to build a new affordable property for each one sold, he said.
The bank levy will rise to 0.088% to raise the £2.5 billion a year the Government wanted from it.
• Pages of budget reaction and analysis in Wednesday’s Yorkshire Post