karlpejera: Public sector to foot bill for George Osborne's growth plan

Chancellor warns there will be six years of austerity ahead

George Osborne has told public sector workers and the low paid that they will be the ones to pick up the bill for his attempts to kickstart Britain's stagnant economy, and warned that weaker growth and higher borrowing would force the country to endure a record breaking six years of austerity.

On the eve of tomorrow's planned strike action over pensions, the chancellor imposed a fresh public-sector pay freeze and cut financial help to the lowest paid workers in order to pay for extra spending on schools, youth unemployment, house building and infrastructure spending.

Osborne travelled to Brussels for emergency talks tonight with fellow European finance ministers immediately after delivering his autumn statement and admitted that failure to resolve the crisis in the eurozone would tip an already fragile UK economy into a double-dip recession.

Forecasts from the independent Office for Budget Responsibility showed the government is on course to borrow an additional �111bn over the next five years, while unemployment will hit 2.8 million and living standards will continue falling until 2013. The OBR said job losses from the public sector would total 710,000, compared with the 400,000 it had previously expected as a result of the government's spending cuts.

Osborne is braced for the economy, which will grow by 0.9% in 2011, to expand by just 0.7% next year ? down from the 2.5% estimated in the March budget. He made it clear that he expects the Bank of England to continue supporting growth through ultra-low interest rates, which have been at 0.5% for more than two and a half years, and by pumping electronic money into the economy through quantitative easing. Osborne said the Treasury was now undertaking "extensive contingency planning" to cope with a possible break-up of the euro, and admitted: "If the rest of Europe heads into recession, it may prove hard to avoid one here in the UK."

Amid fears that Europe has entered the make-or-break phase of its crisis, Italian 10-year bond yields were closing in on the 8% level tonight.

The chancellor announced a three-year spending programme to boost the long-term growth potential of the economy, but said fresh deterioration in public finances meant the extra �5bn for infrastructure ? an additional �1.2bn for education, �400m for house-building and the �1bn cost of scrapping January's increase in fuel duty and limiting rail fare increases to 6% ? had to be found from savings elsewhere.

He caused anger among welfare campaigners by scrapping an increase in child tax credits that will result in an additional 100,000 children dropping below the government's poverty line, and was accused of provoking unions by setting a two-year 1% ceiling on public sector pay increases ? well below the current inflation rate. He also signalled the end of national pay bargaining within two years.

Osborne said the current turbulent market conditions meant Britain "had to live within its means" but tonight Fitch, one of the three credit rating agencies, warned that Britain's coveted AAA status could be at risk. "As with some other major AAA-rated sovereigns, unless off-setting measures were adopted, the capacity of UK public finances to absorb adverse economic and financial shocks that would result in yet higher public debt while retaining its 'AAA' status has largely been exhausted," it said.

Osborne said the OBR now believed the damage caused to the economy as a result of the debt-induced crash of 2008-09 went deeper and was longer lasting than previously thought. But borrowing was falling and debt would come down, he said. "It is not happening as quickly as we had wished because of the damage done to our economy by the ongoing financial crisis. B ut we are set to meet our budget rules. And we are going to see Britain through the debt storm."

Paul Johnson, director of the Institute for Fiscal Studies thinktank, said: "Two more years of substantial real public spending cuts: that is what the chancellor has promised in response to the OBR's dramatically worsened macroeconomic forecasts. Until now, we had been thinking of four years of cuts as unprecedented in modern times. Six years looks even more extraordinary."

Ed Balls, the shadow chancellor, said: "After 18 months in office, the verdict is in: plan A has failed, and it has failed colossally. With prices rising and unemployment soaring, families, pensioners and businesses already know it's hurting. And with billions more in borrowing to pay for rising unemployment, today we find out the truth ? it's just not working."

Conservative MPs were despondent that they will now have to go into an election year committed to �15bn of additional spending cuts in the first two years of the next parliament, and recognise they may have to come to a detailed agreement with their coalition partners before the 2015 general election, setting out how the two parties would cut spending further in the two years following the election.

Figures published today show the coalition plans that 80% of the retrenchment in the final years will come from continued spending cuts and only a fifth from tax rises. Some Tory rightwingers expressed disappointment at the interventionist nature of the growth plan, likening it to the work of Gordon Brown and blaming excessive influence from the Lib Dems. Aides to Nick Clegg were satisfied they had protected Britain's poorest by ensuring out of work benefits and pensions rose in line with inflation of 5%, and benefit cuts were instead loaded on to tax credits. The emphasis on capital investment, nursery places for two-year-olds and a programme to help young unemployed people were all chalked up as Lib Dem victories.

Osborne said: "People in this country understand the problems Britain faces. They can watch the news any night of the week and see for themselves the crisis in the eurozone and the scale of the debt burden we carry. And people know that promises of quick fixes and more spending this country can't afford, at times like this, are like the promises of a quack doctor selling a miracle cure."We do not offer that today. What we offer is a Government that has a plan to deal with our nation's debts to keep rates low; A Government determined to support businesses and support jobs; A Government committed to take Britain safely through the storm."

Larry Elliott

Patrick Wintour