George Osborne: UK faces 'long hard recovery'

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Media captionGeorge Osborne says 'we will lead international response' to turbulent markets

Chancellor George Osborne has warned that excessive global debt meant "the recovery will take longer and be harder than hoped".

It came as he defended the government's austerity plan in the Commons, saying it had made the UK a "safe haven" in the volatile financial markets.

He said contingency plans were in place to ensure UK banks weather the crisis.

Shadow chancellor Ed Balls responded by repeating his party's "grave concerns" over the pace of spending cuts.

'Completely vindicated'

Mr Osborne said that the world faced "the most dangerous time for the global economy since 2008", adding that markets were waking up to the fact that the global recovery would be much weaker than expected.

But he sought to reassure that UK banks would be well protected from any renewal of the crisis.

"I can confirm that the assessment of the Bank [of England], the [Financial Services Authority] and the Treasury is that British banks are sufficiently well capitalised and are holding enough liquidity to be able to cope with the current market turbulence," he said.

"We have in place well-developed and well-rehearsed contingency plans."

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Media captionRobert Peston says it is 'right to be concerned' about global markets

The chancellor said the current financial crisis "completely vindicated" the government's deficit cutting programme.

He pointed out that while the UK stock market had suffered like others in Europe, in contrast UK government debt had risen in value thanks to investors' "flight to quality" during the current market volatility.

Mr Osborne also criticised European partners in his speech, claiming that the "remorseless logic of monetary union" made greater fiscal integration in the eurozone inevitable.

He called on eurozone governments to provide a more comprehensive solution to the eurozone debt crisis, including measures such as common debt obligations - or "euro bonds", something that has been explicitly rejected by Germany.

"We accept the need for greater fiscal integration in the eurozone, while making sure we are not part of it," he said.

'Confidence fairy'

Mr Balls agreed with his opposite number that the UK had been right to stay out of the euro.

But he accused the chancellor of being "deeply complacent or in deep denial" about the state of the British economy.

Mr Osborne's speech came a day after the Bank of England cut its growth forecast for the UK for 2011 from 1.8% to 1.5%, warning that "the headwinds are growing stronger by the day".

The Bank also warned that inflation would rise to 5% this year.

The Bank's governor, Mervyn King, said the main risks to the UK economy came from the rest of the world - notably the apparent slowdown in US growth and the eurozone debt crisis.

Mr Osborne wrote in an article for the Daily Telegraph on Monday that the government had a plan for growth which included lower corporation tax rates, less regulation for small firms, welfare reform, planning changes and lower taxes for entrepreneurs.

Mr Balls cited the work of US economist Paul Krugman, who has accused the UK government of being in thrall to the "confidence fairy".

The Nobel prize-winning economist backs further government spending in the US and UK, to help their economies get out of their slump.

In both countries, long-term government borrowing costs have fallen to historically low levels during the recession, and Mr Krugman claims this shows that markets have not lost confidence in their creditworthiness at all.

The chancellor criticised the US government's stimulus, claiming that despite their decision to borrow and spend more in response to the global recession, the US had seen weaker growth than the UK.

Mr Balls also likened the government's emphasis on spending cuts - in preference to tax rises - to the policies of right-wing "Tea party" Republicans in the US.

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