Britain's Chancellor of the Exchequer has vowed to forge ahead with the very austerity measures critics blame for the country's faltering recovery.
In delivering his autumn financial statement Wednesday, George Osborne said the austerity programs – an ever-stronger barrage of tax hikes and spending cuts – will be extended to 2018, three years longer than the original plan, as growth falters, leading to wider-than-expected budget deficits and a delay in reversing the buildup of national debt.
The combination of austerity and the troubles in the 17-country euro zone, Britain's main export market, triggered the substantial downgrade in Britain's growth outlook.
According to the government's independent Office of Budget Responsibility, Britain's gross domestic product will fall 0.1 per cent this year, compared with the last forecast, made in March, of 0.8-per-cent growth. In 2013, the OBR expects the economy to expand by a mere 1.2 per cent, down from 2 per cent. GDP is expected to rise to 2 per cent in 2014, down from 2.7 per cent, and climb from 2.3 per cent in 2015 to 2.8 per cent in 2016, both down from 3 per cent in the last estimate.
Britain's slow recovery and difficulty in trimming the national debt and budget deficits are symptoms of a wider problem seen throughout Europe: Finding growth is almost impossible when harsh austerity programs are in place.
The problem has been made worse by austerity measures put in place in every country in the European Union, damaging cross-border trade and investment, and raising jobless rates to stubbornly high levels. According to Deutsche Bank, Italy, Spain, the Netherlands, Belgium, Greece and Portugal are in recession and France and Germany are essentially flat-lining.
The slower growth over the next few years will present an enormous challenge for Mark Carney, the Governor of the Bank of Canada who will become governor of the Bank of England next summer, replacing Mervyn King.
With rates already at rock bottom and quantitative easing in place, there are few weapons left in Britain's pro-growth arsenal, meaning Mr. Carney may have to resort to ever more unconventional measures to help revive the economy. Doubling up on efforts to ensure that banks to lend to small and medium-size businesses is likely to be one of them.
Despite the blown growth forecasts and wider-than-expected budget deficits, Mr. Osborne said finances are on the mend and the government will not back down on its austerity pledges. "It's taking time but the British economy is healing," he told MPs.
His pronouncement triggered howls from the Opposition, which noted that Mr. Osborne now expects Britain's debt-to-GDP ratio to fall a year later than his original forecast. "The defining purpose of the government, the cornerstone of the coalition, the one test they set for themselves – to balance the books and get the debt falling by 2015 – is now in tatters," said Ed Balls, the shadow chancellor.
Mr. Osborne said debt as a percentage of GDP will not fall until the 2016-17 fiscal year, when it is forecast to reach almost 80 per cent of GDP. While high by historical standards, that level is no higher than the European Union average. Some Opposition members think the government should take advantage of Britain's low sovereign borrowing costs – the yield on 10-year bonds was 1.76 per cent Wednesday – and invest heavily in job creation programs such as infrastructure development.
According to the Chancellor, Britain's budget deficit will actually fall in the current financial year (2012-13) to £108-billion ($172-billion) from the £120-billion forecast in the March budget. But the deficit is now forecast to rise through 2018 in comparison to previous forecasts. In 2015-16, for example, the deficit is expected to be £73-billion, compared to the last forecast of £52-billion.
Mr. Osborne's spending and taxation measures amounted to tinkering. The wealthy will be hit by reducing the amount of tax relief they receive when they fund their pension. Government departments will see their budgets cut by 1 per cent. Welfare benefits for workers will increase just 1 per cent a year for the next three years and a planned 3-pence-a-litre fuel duty rise has been scrapped.