Osborne confirms pay and jobs pain as growth slows


The chancellor said much of Europe was heading towards recession as he pledged to do "whatever it takes" to protect Britain and keep interest rates low

Chancellor George Osborne has said public sector pay rises will be capped at 1% for two years, as he lowered growth forecasts for the UK economy.

The number of public sector jobs set to be lost by 2017 has also been revised up from 400,000 to 710,000.

Borrowing and unemployment are set to be higher than forecast and spending cuts to carry on to 2017, he admitted.

For Labour, Ed Balls said the figures showed the chancellor's economic and fiscal plans were "in tatters".

Outlining his plans to MPs, based on economic forecasts from the independent Office for Budget Responsibility (OBR), Mr Osborne told MPs the UK economy was now forecast to grow by 0.9% this year - compared with 1.7% forecast in March and 0.7% next year, down from the 2.5%.

He said the eurozone crisis, a hike in global commodity prices and a new assessment that the UK's economic boom was bigger and the bust deeper than previously believed was to blame.

Borrowing was falling and debt would come down but "not as quickly as we wished". In 2011-12 borrowing is now forecast to be £127bn - up from £122bn forecast in the Budget and, over five years, the government is expected to borrow £111bn more than predicted in March.

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But he said, because debt interest payments had dropped, the government would be spending £22bn less over this Parliament on that than predicted.

The OBR forecast that unemployment would rise from 8.1% this year, to 8.7% next year - before falling to 6.2% by 2016. Its earlier prediction that a squeeze on the public sector would mean 400,000 job losses over five years has been nearly doubled, to 710,000 - as a result of extra spending cuts pencilled in for 2015-16, and 2016-17.

Chief Secretary to the Treasury Danny Alexander later told BBC Newsnight that the government did not yet know where the bulk of the £30bn additional cuts - £1.2bn of which is expected to come from changes to tax credits - would come from.

He said: "We haven't decided where those cuts will come from. It doesn't have to be found quickly, that is in 2015-16 and 2016-17. In good time, well before the next election, we will set out precisely what the measures are to deliver those additional savings in the next Parliament."

The chancellor conceded he would not now be able to eliminate the structural deficit and see national debt falling by 2014/15 as had been predicted. The structural deficit is now predicted to be eliminated by 2015-16, pushing it beyond the next general election.

'Debt storm'

While the OBR had not forecast a double dip recession - as the economic think tank the OECD did on Monday - the chancellor warned that if the rest of Europe went into recession, "it may prove hard to avoid one here".

But he said the government would meet its budget rules.


  • Growth forecasts for UK economy cut 0.9% this year and 0.7% next year
  • Borrowing forecasts revised up - an extra £111bn to be borrowed over five years
  • Pay cap of 1% for public sector workers once two-year pay freeze ends
  • Unemployment to rise from 8.1% this year to 8.7% next year
  • More public sector jobs forecast to go - 710,000 over five years
  • £40bn "credit easing" scheme to underwrite bank loans to small firms
  • Working age benefits will be uprated by 5.2% in line with September's inflation rate
  • Basic state pension to rise in line with inflation by £5.30
  • Other increases in tax credits will not go ahead in 2012-13
  • £5bn plan to improve national infrastructure over three years.
  • £1bn scheme to subsidise work placements for the young unemployed
  • £500m housebuilding plan in England
  • January rise in regulated rail fares to be capped at 6.2%, not 8.2%
  • Doubling of free childcare places for deprived two-year-olds to 260,000 in England
  • 3p fuel duty rise due in January to be delayed or frozen
  • Bank levy to be increased

Mr Osborne said: "Much of Europe now appears to be heading into a recession caused by a chronic lack of confidence in the ability of countries to deal with their debts.

"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."

BBC News Channel chief political correspondent Norman Smith said many would be surprised by the scale of the pain ahead, with difficult austerity measures planned even after the next election and a big squeeze on living standards, with the OBR predicting no significant rise in disposable income before 2014 and a post-war record fall in incomes this year.

Among money-saving measures outlined by the chancellor were a 1% cap on public sector pay for two years, once the current two-year pay freeze ends from 2013 - Mr Osborne said the government "cannot afford the 2% rise assumed by some government departments thereafter". That would save more than £1bn by 2014-15, he said.

He acknowledged a 1% cap was "tough" but said many public sector workers would be helped by "pay progression" - annual increases in salary grades - even when pay was frozen.

Plans to raise the state pension age from 66 to 67 would be brought forward by eight years to 2026, to save £59bn in the long term.

The child element of child tax credit and the disability elements of tax credit will be uprated in line with inflation, but other tax credit increases will be restricted.

But in April there will be a £5.30 increase in the basic state pension to £107.45, in line with the 5.2% inflation rise in September.

Pensioners receiving pension credit will also benefit from an increase worth £5.35 and "working age" benefits would also go up in line with the higher inflation figure - contrary to earlier reports - which he said would be a "significant boost to the incomes of the poorest".

Fuel duty

Other announcements included an increase in the bank levy to 0.088% from 1 January and a 50% discount for social housing tenants who want to buy their own home - the proceeds of which would go towards building new affordable homes.

Mr Osborne also went through a series of schemes aimed at boosting the UK's flagging economy.

Start Quote

His economic and fiscal strategy is in tatters”

End Quote Ed Balls Shadow chancellor

These include a £20bn national loan guarantee scheme for small businesses, a £40bn "credit easing" scheme to underwrite bank loans to small businesses, plans for £5bn spending on big infrastructure projects over three years - with 35 road and rail schemes identified, £400m fund to kick start housing projects, an extended business rate holiday for small firms and an extra £1.2bn for schools in England.

Rail fares, and fares for the Tube and London buses, will be capped at inflation plus 1% while the fuel duty rise for January has been axed and a planned 5p rise in August limited to 3p. Free nursery care targeted at two-year-olds from poorer families will be extended to 260,000 toddlers and Mr Osborne confirmed a £940m scheme to target youth unemployment by subsidising work placements in the private sector.

Overseas aid will be adjusted as it is currently on track to surpass the government's commitment to raise it to 0.7% of GDP, which Mr Osborne said could not be justified in the current circumstances.

But for Labour, shadow chancellor Ed Balls said the figures showed the "truly colossal failure of the chancellor's plan".

"Let's be clear what the OBR has told us today: Growth flatlining, down this year, next year and the year after. Unemployment rising, well over £100bn more borrowing than the chancellor planned a year ago - more borrowing that the plan which the chancellor inherited at the last general election.

"As a result his economic and fiscal strategy is in tatters."

On the issue of public sector pay, TUC general secretary Brendan Barber said: "The chancellor's refusal to back a Robin Hood tax, and make nurses pay instead, speaks volumes about his values.

"Public servants are no longer being asked to make a temporary sacrifice, but accept a permanent deep cut in their living standards that will add up to over 16% by 2015 when you include pay and pension contributions."


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  • rate this

    Comment number 613.

    1% Oh George you are spoiling us! Last year we only got 0.5%. This is too indulgent.

  • rate this

    Comment number 612.

    I'm still not clear how capping pay, squeezing tax credits and putting 710,000 public sector workers on the dole is going to revive demand in the economy, and if it isn't then how is the private sector going to grow?

    Osborne is driving into the abyss, or rather he's driving everywhere save the square mile into the abyss..

  • rate this

    Comment number 611.

    Wow, this government really hates public sector workers.

  • rate this

    Comment number 610.

    Just now

    When's this public sector strike? I hope it snows... hard

    and who do you think will have to clear the roads the next day so the you can get to work.

    It couldn't be the public sector could it

  • rate this

    Comment number 609.

    560. For sure there is no easy way. But are we in a Democracy or not? How can ANY of the 3 main parties justify the shocking levels of City fraud, tax evaision and tax havens in these times? Clearly the time has come for TOUGH action on all 3. It would cure our debt and rebuild our economy. WHY is it not happening?

  • rate this

    Comment number 608.

    "582.Total Mass Retain
    ND has a solution: allow gun ownership and give "upright citizens" the right to arm and defend themselves against such people, shooting them on sight if necessary."

    That's right, it works all the time in the US, where there is obviously no crime at all. Well, not on Fox News anyway.

  • rate this

    Comment number 607.

    And still the bankers get their bonuses, the business moguls their inflated salaries - all at our expense. Cameron is a do nothing PM!

  • rate this

    Comment number 606.

    The gall of Balls/Milliband.Not forgetting 'There's-no-money-left' Liam Byrne.We're in a mess and spending our way out of it isn't an option whoever is to blame.I work in the public sector and the waste is palpable.The pension is the best on the market.I don't mind paying more or working longer.I was intending to anyway since I came into it late after putting my daughter through uni by myself...

  • rate this

    Comment number 605.

    Danny Alexander, you will be looking for a new seat come the next election, I guess that once you & Nick join the Tory party safe seats will be found as your 30 pieces of silver reward for your sychophantic head nodding routines.

    Just be careful your head doesn't fall off, is a little crumb of power worth selling your soul to the highest bidder.

  • rate this

    Comment number 604.

    Don't worry. I'm sure many of you will be voting Labour at the next election and we can get back to the usual business of spending way beyond our means.

    BTW, just lost my public sector job thanks to cut-backs, so I'm already hit by this - but I'm a realist unlike those who are going out on strike tomorrow.

  • rate this

    Comment number 603.

    So the 2008 banking crash caused by the banks resulted in deeper problems than thought and the solution is austerity, public sector job cuts and limited a pay rise? Add in the VAT increase and other cuts and what we have is a "deficit tax" being paid not by those who caused the problems, the banks, but the ordinary people. The banks should be being fleeced but the Tory way is fleece the people.

  • rate this

    Comment number 602.

    @558 red

    you can't deny facts; public sector workers are paid more on average and receive large final salary schemes with low contributions and good employer contributions while private sector workers get money purchase pensions which are crap by comparison.

    it is funded by future tax on the next generation, they don't pay for their pensions the kids do

    leave the bubble and join the real world.

  • rate this

    Comment number 601.

    420.anonimouse = 50 hour week. Ooh ! If you are posting at 15:45 ,you must be on the night shift, or maybe it's your day off ! Stressful. Pull the other one.
    You really are something else aren`t you. A pathetic loser who has nothing better to do than be a troll

  • rate this

    Comment number 600.

    Why is it cheaper to get Biffa to collect rubbish than the council its probably the amount of managers the council employ compared to Biffa, CUT AT THE TOP NOT AT THE BOTTOM and slash benefits to american levels, force people back to work

  • rate this

    Comment number 599.

    For all those that blindly criticise public sector workers, answer this- is it more important for society to have people who are willing to teach our children, heal our sick, defend our country, protect our safety, look after our environment etc or sell us tat we don't want or need? We need strong public services is to keep the profit motive away from things that are just too important to risk.

  • rate this

    Comment number 598.

    Where do people get off saying "Its our fault for working in the private sector"? The private sector is the most sacred thing to this country, without it, THERE WOULD BE NO PUBLIC SECTOR OR OBSCENE PENSIONS! If anyone should be getting obscene pay its the private sector!

  • rate this

    Comment number 597.

    This cut all come in the back of allowing pregnant mothers the option of choosing C -Section at taxpayers expense even when it is not for medical reason. It would also help if the government abolish car parking charges for public sector workers, its not government policy and tantamount to illegal taxation on motorists.

  • rate this

    Comment number 596.

    Ed Balls: "As a result, his economic and fiscal strategy is in tatters."

    My question is: Did Osborn actually have an economic and fiscal strategy?

    Obviously not, he is merely following his party dogma, cuts good public sector bad. Time for the ConDem coalition to go before we are condemned to becoming very fourth world.

  • rate this

    Comment number 595.

    So after attempting to bully the public sector for the best part of a week, they follow through with nearly doubling the amount set to join the already overwhelmed job centres across the country! Maybe the easiest way to kick start the economy is to lower tax on fuel.
    But we seem to be stuck in a country where the people can not fully trust any one party to lead us!

  • rate this

    Comment number 594.

    I work in the private sector, Not had a pay rise for 3 years, We all had to take a 10% paycut to see us through, I had to stop my pension payments to cover this. All looking Ok, Just spent the last 3 years getting by, No Cinema, No Meals out, No Take aways, But can't complain as we in the west are all much better off than we think. ;-)


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