George Osborne plots collision course with today’s picket lines

Speaking as figures showed flatlining Britain will have to borrow £111 billion more over the next four years, the Chancellor declared he “cannot afford” to maintain the public sector in its present state and warned it may “prove hard” to avoid a second recession in three years.

As tens of thousands of public-sector workers stay at home today, Mr Osborne warned that by 2017, nearly 750,000 will have lost their jobs. Those that remain in work, he said, could expect threadbare pay rises of only 1 per cent, following the end of the current pay freeze. Meanwhile, the state pension age will rise for both public and private sector staff, from 66 to 67, by 2026. The move will affect anyone below the age of 52.

That reflected the mood of the Chancellor’s autumn statement yesterday, in which he made it clear Britain’s recovery from the debt crisis would drag on for years, with Treasury officials pencilling in public-sector cuts as far ahead as 2017.

Spending more money “this country can’t afford”, Mr Osborne said, was like “the promises of a quack doctor selling a miracle cure”.

His bleak outlook came as the government’s official independent forecaster, the Office of Budget Responsibility (OBR), revealed this year had been the toughest on disposable household budgets since the end of the Second World War, with families’ spending power falling by 2.3 per cent compared with 2010.

It blamed rising food and energy costs, which have dented household spending plans. The OBR said it would be 2013 before households generally began to feel wealthier.

The markets remained largely neutral on Mr Osborne’s plans, with the FTSE up marginally. But an ITV/ComRes poll found 52 per cent of adults thought the government “has lost control of the economy”, with 32 per cent disagreeing and 16 per cent saying they did not know.

Neither the OBR nor the Chancellor were able to quantify further damage that could be caused to the economy if the eurozone imploded. Mr Osborne said he was doing “extensive contingency planning” to deal with “all potential outcomes”, while the OBR admitted it could not even “quantify the risk” of the single-currency area collapsing.

The Chancellor’s statement came hours before the country’s first mass walkout in a generation, with union leaders set to tell public-sector workers their living standards were “being hammered in the name of reducing the deficit”. TUC general secretary Brendan Barber described Mr Osborne’s plans as a recipe for “permanent austerity”.

The Scottish Government said Mr Osborne had had to “swallow a bitter pill” in admitting that borrowing would have to rise, but it described his growth plan as “too little, too late”.

Economists said it was clear the UK government’s austerity drive would be extending well into 2014 and 2015, the likely dates for the Scottish independence referendum, meaning the economy will play a key role in the debate on Scotland’s future.

Labour shadow chancellor Ed Balls, meanwhile, said the coalition government’s financial plans were “in tatters”. He said families who knew the pain of the cuts would also now know the government’s plan wasn’t working either.

Meanwhile, the respected Institute for Fiscal Studies said Mr Osborne’s statement had made it clear the length of austerity drive had now grown. Director Paul Johnson said: “Until now, we had been thinking of four years of cuts as unprecedented in modern times. Six years looks even more extraordinary.”

He also criticised Mr Osborne for promising austerity without specifics. “One presumes that he is keeping his fingers crossed that something will turn up which will make such deep cuts unnecessary. He has ended up in exactly the place he wanted to avoid – promising further spending cuts in the period after the next election,” Mr Johnson said.

Mr Osborne’s confirmed several headline initiatives, including a new bid to cut youth unemployment, and a £30bn infrastructure investment programme designed to boost growth. He also gave details of his plan to provide credit direct to small and medium-sized companies struggling to raise cash from the banks.

A fuel duty increase due in the new year will be cancelled, but he added to Treasury coffers by cancelling planned increases in child and working tax credits.

However, it was the fresh warnings to public-sector workers that grabbed the attention, particularly as they come with workers going on strike today.

With the Treasury preparing to extend public-sector cutbacks until 2017, the OBR said the public-sector payroll would fall even further – from a previously predicted 400,000 to 710,000 by that year. But it expects a net gain in employment, as long as the private sector picks up the slack.

As well as pushing through more pay restraint, the Treasury is to look at the possibility of setting different rates of pay for public-sector workers depending on where they live in the country. If they are deemed to be “squeezing out” private sector activity, they may get paid less, Treasury officials confirmed.

Mr Osborne sought to use his statement to argue the government’s tight grip on the public purse had ensured Britain avoided the “debt storm” sweeping Europe. “We will do whatever it takes to protect Britain from this debt storm, while doing all we can to build the foundations of future growth,” he said.

That protection did not mean Britain was immune from recession, however. He warned: “If the rest of Europe heads into recession, it may prove hard to avoid one here in the UK.”

He highlighted the low rates of interest paid by Britain on its own deficit as confirmation that his policies had prevented the country from paying out billions more in debt interest. “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,” he said.

However, Mr Balls 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.”

The Scottish Government said it was writing to the UK government to ask by how much its budget could fall if further cutbacks were pushed through.

Finance secretary John Swinney said: “Now and into 2012 is the danger point in terms of the UK economy re-entering recession, yet over 70 per cent of the proposed action on capital spending is not due to happen until 2013-15.”

The Scottish Government said the Treasury’s plan to raise pay by 1 per cent was “coming into line” with plans in Scotland.”