Finances 'worse than we thought'

Drawing on figures produced in the first report from the newly-created Office for Budget Responsibility (OBR), Mr Osborne told MPs "it is indeed worse than we thought" and said "this coalition Government has inherited from its predecessor one of the largest deficits in the world".

Shadow chancellor Alistair Darling claimed his successor was "scaremongering" and damaging business confidence but Mr Osborne insisted the growth forecast from the new financial watchdog was "lower than the country was told at the time of the election".

The Chancellor told the Commons: "The forecasts for growth are, sadly for our country, lower in every single year than the figures that were announced by the previous chancellor at the time of the last government's Budget in March.

"He told us growth would soar to 3.25 per cent in 2011 and then 3.5 per cent in 2012.

"We can only speculate as to why such rosy forecasts for a trampoline recovery were produced only weeks ahead of a general election."

The OBR forecast growth to reach 1.3 per cent this year and 2.6 per cent next year, rising to 2.8 per cent in 2012 and 2013 then slipping to 2.6 per cent in 2014.

However, public borrowing is set to be 8bn lower than previously forecast at 155bn.

The OBR admitted "major uncertainties" over its predictions – including banks' ability to lend to support the recovery, the extent to which the private sector can fill the gap left by public spending cuts, and worries for demand in Europe, a major export market for Britain.

Mr Osborne said any good news on borrowing was offset by the figures on the structural deficit – the element which remains even when growth returns – which was forecast to be 9bn higher than suggested in March's Budget, rising to 12bn next year.

The report also set out the interest payments Britain would have to make on its national debt, rising from 42bn this year to 67bn in 2014/15.

There were cries of "shame" and "apologise" from Government benches as Mr Osborne said: "More than a quarter of a trillion pounds coming from the pockets of taxpayers over the course of this Parliament simply to service the debts left by the previous government."

But Mr Darling cautioned against cutting public spending too sharply, pointing out the OBR acknowledged that "higher borrowing...continues to support the economy" without which "there was a grave risk that recession could have tipped into a depression".

The watchdog had forecast 30bn less would be borrowed over the course of the Budget period, said Mr Darling.

The shadow chancellor said using the OBR figures, Mr Osborne would need to find 118bn of cuts or tax rises to eliminate the structural deficit over the course of the Parliament.

But Mr Osborne told him the OBR report revealed the Labour government had "pencilled in" 44bn of cuts but had not shown how that would be achieved.