Miserable UK economy forecast provides gloomy backdrop to rescue plan

The Office for Budget Responsibility (OBR), the Government’s independent economic forecaster, revealed economic output is likely to have grown by only 0.9 per cent in 2011 compared to the 1.7 per cent forecast in March.

The OBR has revised its growth forecast for 2012 down from 2.5 per cent to 0.7 per cent and for 2013 from 2.9 to 2.1 per cent, all depending, Mr Osborne told MPs, on the eurozone avoiding recession and dragging the UK with it.

Slower growth than expected meant it would take longer to pay off the national debt, while the creation of new jobs would be slower to replace those lost from cuts.

The forecast for public sector job losses is significantly higher, with as many as 710,000 jobs being shed by 2017, says the OBR report, and unemployment is forecast to increase from 8.1 per cent now to 8.7 per cent next year, putting an extra 210,000 people out of work.

Mr Osborne spoke with his Liberal Democrat second-in-command, Danny Alexander, Chief Secretary to the Treasury, sat alongside him. Lib Dem MPs acknowledged they were hearing policy which had been accepted by their representatives in the coalition Cabinet.

But Shadow Chancellor Ed Balls, for Labour, said the Government’s economic and fiscal strategy was “in tatters” and the country had “all of the pain and none of the gain”.

The Morley and Outwood MP said: “After 18 months in office, the verdict is in. Plan A has failed, and it has failed colossally.”

The Institute for Fiscal Studies said that there was a very serious prospect of spending cuts every year to 2017 to balance the books.

Director Paul Johnson said Mr Osborne would wait before making this clear but must be crossing his fingers for an upturn to avoid it. He had ended up in “exactly the place he wanted to avoid”, contemplating austerity measures until beyond the next General Election.

Mr Johnson said: “Until now we had been thinking of four years of cuts as unprecedented in modern times.

“Six years looks even more extraordinary. Mr Osborne has had to pencil in £15 billion of additional cuts by 2016-17 in order for his plans to be consistent with his own fiscal mandate.

“The OBR’s forecast suggests he will only meet his target to have public debt falling by the planned date of the next General Election by a whisker.”