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Britain faces more austerity pain as outlook darkens

Ben Perry
Chancellor of the Exchequer George Osborne (right) leaves the Treasury with Chief Secretary to the Treasury Danny Alexander. Osborne warned Britons that they faced an extra year of austerity measures and insisted that reversing his belt-tightening measures now would be a "disaster".

Chancellor of the Exchequer George Osborne on Wednesday warned Britons that they faced an extra year of austerity measures and insisted that reversing his belt-tightening measures now would be a "disaster".

Osborne said Britain would face spending cuts and tax hikes until 2018 -- after the coalition government led by Prime Minister David Cameron had already previously extended the programme by two years to 2017.

The bleak announcement in a budget update, coming alongside grim news that the government is slashing its outlook for economic growth, is likely to heap further pressure on the administration mid-way through a five-year term in power.

Addressing parliament on Wednesday, Osborne also acknowledged that the government would fail to meet its official target for reducing public debt as a proportion of economic output by 2015-16.

"It is taking time but the British economy is healing after the biggest financial crash in our lifetime," Osborne insisted in his Autumn Statement.

Confirming that he was prolonging the government's austerity programme to 2017-18 -- beyond Britain's next general election due in 2015 -- Osborne said: "We are making progress. It's a hard road, but we are getting there. Britain is on the right track and turning back now would be a disaster."

His comments came on the same day as a separate austerity budget was presented in Britain's key trading partner Ireland.

Explaining why he was extending cuts in public spending and hiking taxes again, Osborne said the British economy faced "deep-seated problems at home and abroad."

The Conservative-Liberal Democrat coalition government, which came to power in 2010, has imposed a series of painful austerity measures to slash a record deficit that was inherited from the previous Labour administration.

Cameron and Osborne have overseen the loss of tens of thousands of public-sector jobs, slashing workforces in the military, health service and various departments.

The government has also faced huge protests from disgruntled workers and students in response to the spending cuts and sharp rises in university tuition fees.

The main opposition Labour party meanwhile said on Wednesday that Osborne's economic plans were "in tatters".

The party's finance spokesman Ed Balls said: "Today, after two and a half years, we can see, people can feel in the country, the true scale of this government's economic failure.

"Our economy this year is contracting, (and) the chancellor has confirmed government borrowing is revised up this year, next year and every year."

Britain also slashed its economic outlook on Wednesday, forecasting the economy would shrink by 0.1 percent this year and then return to growth in 2013, according to figures published alongside the budget update.

The new forecast, issued by the Office for Budget Responsibility (OBR) fiscal watchdog, showed a sharp drop on the previous 2012 growth estimate of 0.8 percent that was given in Osborne's annual budget in March.

The OBR added that gross domestic product was forecast to grow by 1.2 percent in 2013. That compared with previous guidance for expansion of 2.0 percent.

Osborne also revealed that debt as a proportion of gross domestic product (GDP) was now expected to fall in 2016-17 -- a year later than previously forecast.

Recent official data showed that Britain had escaped from recession in the third quarter of this year, with its economy growing by a robust 1.0 percent.

However the return to growth was owing to one-off factors such as the London Olympics and rebounding activity after public holidays in the second quarter.

Osborne had some positive news for motorists and businesses, postponing a hike in fuel tax due to have come into force in January and saying he would cut corporation tax by one percentage point to 21 percent in 2014.

The coalition has blamed the recession largely on the debt crisis in the neighbouring eurozone, but the main opposition Labour party claims that the downturn was mainly owing to the hefty cuts in state spending.

On Tuesday, Osborne pledged to invest £5.0 billion (6 billion euros, $8 billion) in schools, transport and science over the next two years, with the cash sourced from civil service cutbacks.

And on Monday, Osborne launched a campaign against "tax dodgers" and "cowboy advisers" to claw back £2.0 billion a year, as lawmakers alleged that multinationals such as Starbucks and Google are avoiding huge tax bills.

The government argues that the elimination of Britain's deficit is vital in order to maintain its top-level AAA credit rating and keep borrowing costs low.

However, IHS Global Insight economist Howard Archer cautioned that the latest downgrades would raise questions about the cherished rating.

"Further fiscal slippage caused by weak growth from here could result in the loss of the UK's 'AAA' rating," he added.