Osborne stays in buoyant mood despite choppy waters

The Chancellor said there are grounds for "cautious optimism" over the country's prospects, rejecting Labour accusations that he was taking a "gamble" by embarking on one of the biggest programmes of spending cuts ever attempted in Britain.

The gamble would have been to not act, he said in a speech to the City. Mr Osborne was talking on the day that new figures revealed that the inflation rate eased to 3.1 per cent in July from 3.2 per cent the previous month – still well above the Bank of England's two per cent target.

His speech came ahead of the autumn's comprehensive spending review, in which he will outline plans for most Whitehall departments to make cuts of about 25 per cent, in an effort to reduce the 155bn budget deficit.

It also follows criticism that the Government is at risk of being defined entirely by its cuts programme and failing to deliver a positive message about the future. But the chancellor warned that the situation could deteriorate quickly if the Government goes into "denial" over the scale of its deficit, and does not follow through on tough spending curbs.

Mr Osborne said: "Here in Britain we can start to be cautiously optimistic about the economic situation. GDP growth in the second quarter surpassed expectations.

"Employment is growing at the fastest pace for over a decade, confounding predictions that the economy cannot generate private sector jobs.

"Manufacturing is picking up and exports are recovering thanks to increasing global demand.

"The much-needed rebalancing of our indebted economy – away from government and towards the private sector, away from consumption and towards business demand, away from imports and towards exports – is beginning."

Mr Osborne reiterated Bank Governor Mervyn King's warning last week that we are likely to face a choppy recovery.

Amid the economic uncertainty there was at least some good news for motorists yesterday, as Yorkshire-based supermarket chain Asda announced it was lowering its petrol prices, cutting 1p off a litre of petrol and 2p a litre off diesel.