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Osborne Forecasts Higher Borrowing Amid U.K. Economic Slump

Chancellor of the Exchequer George Osborne
Chancellor of the Exchequer George Osborne. Photographer: Chris Ratcliffe/Bloomberg

Chancellor of the Exchequer George Osborne said U.K. economic growth will be slower than forecast this year and next, forcing the government to borrow more and extend spending cuts to narrow the budget deficit.

Growth will be 0.9 percent in 2011, half the 1.7 percent forecast in March, and 0.7 percent next year, less than a third of the previously predicted 2.5 percent, Osborne said, citing figures from the Office for Budget Responsibility. The deficit will reach 120 billion pounds ($188 billion) in the financial year ending in March 2013, more than the 101 billion pounds previously forecast, the chancellor said. More than 700,000 government employees will lose their jobs by 2017, the OBR said.

“Our debt challenge is even greater than we thought because the boom was even bigger, the bust even deeper and the effect will last even longer,” Osborne told lawmakers during his end-of-year financial statement to the House of Commons in London today. “If the rest of Europe heads into recession it may prove hard to avoid one here in the U.K.”

The downgraded growth forecasts open Osborne up to further attack from the opposition Labour Party, which says the severity of the chancellor’s budget-deficit program has added to unemployment, shattered consumer confidence and failed to stem the pace of borrowing. Osborne says investors trust his plan and that is reflected in record-low bond yields.

Pound Rises

Ten-year government bonds advanced, with yields down 5 basis points at 2.22 percent at 2:01 p.m. London time, below the 2.31 percent on German bonds of similar maturity. The pound rose 0.5 percent to $1.5594.

“Growth is flatlining, down this year, down next year, unemployment rising,” and projected government borrowing is more than 100 billion pounds more than the chancellor set out a year ago, Ed Balls, Labour’s economic spokesman told lawmakers. “His economic fiscal strategy is in tatters. Plan A has failed and failed colossally.”

The chancellor said spending will be cut by 0.9 percent a year in real terms starting in April 2015, adding to 80 billion pounds of reductions already planned, so that he can meet his target of eliminating the structural budget deficit. That will extend the duration of the austerity plan by two years.

Osborne said the growth forecasts for 2013 and 2014 had been lowered to 2.1 percent and 2.7 percent respectively. The deficit will increase by a cumulative 112 billion pounds over five years.

“Britain will pay its way in the world,” Osborne said.

Pay Squeeze

Savings will be made by squeezing the pay of state workers, who are already planning to go on strike tomorrow over curbs to their pensions, so that incomes increase by no more than 1 percent after the current freeze ends in 2013.

“In the current circumstances the country cannot afford the 2 percent rise assumed by some government departments, so instead we will set public-sector pay awards at an average of 1 percent for each of the two years after the pay freeze ends,” Osborne said. The Treasury is also examining “how public-sector pay can be made more responsive to local labor markets,” the chancellor said.

The public-sector payroll will fall by 710,000 in the six years through the first quarter of 2017, the OBR said. It previously predicted the loss of 400,000 jobs in the five years through the first quarter of 2016. The OBR expects the cuts to be offset by the creation of 1.7 million private-sector jobs.

‘Reassure Markets’

“The political consensus within the coalition for deficit reduction is holding,” Ian Stewart, chief economist at Deloitte LLP in London, said in an e-mail. “This will reassure markets that have been unsettled by the political gridlock over deficit reduction in the U.S. and by the huge uncertainties about the ability of euro-area governments to manage and finance budget deficits.”

Osborne said the U.K. will introduce a 40 billion-pound “credit-easing” program to spur growth by using low borrowing rates available to the government to support lending to small and medium-sized companies.

The government agreed with Bank of England Governor Mervyn King to reduce the part of the central bank’s asset-purchase facility used to buy company debt by 40 billion pounds, Osborne said. Funding under the credit-easing program will be allocated to retail banks by the Bank of England depending on how much they increase net and gross lending to companies, he said.

Planning Laws

The burden of regulation on businesses will be cut, Osborne said, making it easier to fire people and changing the planning laws to reduce the costs to companies. Small companies will also see their tax bills cut, Osborne said.

“We will cut the burden of health and safety rules on small firms because we have a regard for the health and safety of the British economy too,” Osborne said. “It’s no good endlessly comparing ourselves with other European countries. The entire continent is pricing itself out of the world economy.”

Osborne announced measures designed to relieve the burden on squeezed families, including canceling an increase in fuel duty of 3 pence per liter scheduled for January 2012. The government will provide funds to limit rail fare increases to 1 percentage point more than retail-price inflation, rather than 3 points. Mortgage indemnities will also help 100,000 families buy new built homes, Osborne said.

‘Cost of Living’

“People know how difficult things are, how little money there is, but where we can help with the rising cost of living, we will,” Osborne said. “The government can use the low interest rates we’ve secured to help young families too, who want to buy a home but can’t afford the very large deposits that banks are now demanding.”

Osborne blames the sovereign debt crisis in the euro area for the deteriorating outlook. King said yesterday said the U.K. is being “increasingly threatened” by the euro-area crisis, and authorities must be ready to act if it continues to escalate.

The government’s forecasts were preceded yesterday by a similarly gloomy outlook for the U.K. from the Organization for Economic Cooperation and Development, which said the U.K. may already be in recession and predicted that the Bank of England will probably add to stimulus early next year.

“We expect further growth downgrades to push the borrowing forecasts even higher in future budgets and statements, deepening concerns about the U.K.’s fiscal position and testing Osborne’s commitment to his own rules,” Jonathan Loynes, chief European economist at Capital Economics Ltd. in London, said in a note to investors. “For now though, the fact that the chancellor has stuck to his plans should maintain the gilt market’s status as a safe haven from ever-widening troubles in the euro zone.”

U.K. retail sales unexpectedly fell in November at the fastest pace in almost three years, according to a survey published yesterday by the Confederation of British Industry. Consumer confidence declined to a record low in October, Nationwide Building Society said on Nov. 17.

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