In his fourth budget, Chancellor George Osborne says growth will be lower than previously forecast, but Britain will avoid a triple-dip recession.
Mr Osborne told the Commons that the independent Office for Budget Responsibility (OBR) had lowered its growth forecast from 1.2 to 0.6 per cent for 2013. Gross domestic product (GDP) is then expected to pick up, reaching 1.8 per cent in 2014 and 2.3 per cent in 2015.
Asked by Channel 4 News if the OBR had ever produced an accurate growth forecast, chairman Robert Chote said: “The growth predictions started off being too pessimistic back in the first forecast we produced back in 2010, and then basically the story has been that the economy has not picked up as we, or indeed many other people, anticipated.”
Mr Chote was then asked if he could be sure the OBR’s latest forecasts were accurate. He said: “We’re a bit more pessimistic than the Bank of England and the average of outside forecasters over the next couple of years, but there’s huge uncertainty around any of those forecasts.”
The chancellor made it clear that he saw no alternative to his deficit reduction strategy, but conceded that it was taking longer than expected to make cuts.
“It is taking longer than anyone hoped, but we must hold to the right track. We’ve not cut the deficit not by a quarter, but by a third,” he said.
Mr Osborne also said that while borrowing was set to fall, total debt would rise.
He announced that the remit of the Bank of England‘s monetary policy committee would be expanded beyond the targeting of inflation, which is at a nine-month high. This is a sign that the government believes the bank could play a bigger role in promoting growth.
He gave some relief to business, with a 1 per cent reduction in corporation tax to 20 per cent in 2015 and a cut in national insurance contributions.
Mr Osborne started his speech by saying he was going to “level with people about the difficult economic circumstances we still face and the hard decisions required to deal with them”.
As the graphic (left) shows, debt was always forecast to rise – but it is now rising more than expected, meaning Mr Osborne will miss his “supplementary target” of seeing debt falling as a percentage of GDP by 2015-16. It is now expected to rise for another year, peaking in 2016-17 as a percentage of GDP.
The government had already said that fresh cuts would be imposed on some Whitehall departments over the next two years to free up £2.5bn for extra spending on housing and infrastructure.
It had also announced plans for childcare tax breaks, with subsidies of £1,200 per child available for working parents.
As expected, Mr Osborne said progress towards a £10,000 tax-free personal allowance would be brought forward to 2014, while a scheduled rise in fuel duty would be scrapped.
But he said the 1 per cent cap on public sector pay rises would be extended by one year to 2015-16, with limits on automatic pay increase progression.
A new single-tier state pension will come into effect in 2016, a year earlier than previously thought, and a cap on social care costs will be introduced in 2017 and protect savings above £72,000, rather than the £75,000 previously announced.
A proposed 3p beer duty rise has been dropped and replaced by a 1p cut, but planned rises in other alcohol duties will go ahead.
Labour leader Ed Miliband said it was “more of the same” from a “downgraded chancellor”, adding: “Every budget he comes to this house and things are worse, not better for this country.
“Compared to last year’s budget – growth last year down, growth this year down, growth next year down, growth in 2015 down.”
Mr Osborne was speaking just hours after the publication of official figures showing that unemployment has risen by 7,000 to 2.52 million – the first increase in a year – with the entire rise caused by more 18 to 24-year-olds out of work.
It also followed his first message on Twitter, in which he said the budget would help “those who want to work hard and get on”.
Government sources are confident that Mr Osborne’s budget announcements will not unravel in the way that some of his measures, such as the so-called “pasty tax“, did last year.