Osborne says UK at risk if eurozone 'goes belly up'
George Osborne says the economic situation in the UK will get "very much worse" if the eurozone "goes belly up".
The chancellor urged Europe to take "decisive action" as he defended the "hard decisions" the UK government has made on public sector pay, the state retirement age and working tax credits.
But for Labour, Ed Balls accused him of "a catastrophic error of judgement".
He said Mr Osborne's austerity measures had left the UK unable to cope with global shocks like soaring oil prices.
In his Autumn Statement to MPs on Tuesday, the chancellor said the Office for Budget Responsibility (OBR) was now forecasting that the UK economy would grow by 0.9% this year - compared with 1.7% forecast in March - and 0.7% next year, down from 2.5%.
The OBR also predicted that unemployment would rise from 8.1% this year, to 8.7% next year, and the number of public sector job losses would be almost twice previous estimates, at up to 710,000 by 2017, as a result of extra spending cuts.
Shadow chancellor Ed Balls told BBC Radio 4's Today programme he had warned 18 months ago that cutting spending so deeply and quickly would damage the UK's economic resilience.
"I have to say that if there's a hurricane brewing, you don't rip out the foundations of your house. We have done that and that's why the chancellor is in such a difficult position," he said.
"We've got the worst of all worlds, his plan has colossally failed, but what's he saying? Just more of the same."
The OBR said much of the contraction in the UK economy could be blamed on the rise in global energy and commodity prices.
But Mr Balls said: "The oil price shock can't explain why Britain has done so much worse over the last year than America or the eurozone.
"The reason is because we overlaid on top of that this very strict fiscal contraction."
Mr Osborne said he did not "underestimate" the impact of the decisions he was taking on people's lives, but said they were necessary in order to protect sectors like the NHS and schools.
"There are many things the government spends money on and the Parliament of the day, the elected politicians, have to make those choices... but I think we have shown you can face up to these difficult decisions."
But he said he did "sympathise" with the difficulties people were facing, adding: "Everywhere I am able to do something to help, within the very, very limited means the government has at the moment, I have done that."
Asked whether a failure to sort out the debt crisis in the eurozone could make the situation in the UK much worse, he said: "Yes I'm afraid that's the case.
"I think if the eurozone goes belly up, as you might put it, then of course things will be very much worse.
"In a way what's happening in the eurozone is a reminder to Britain that if you don't face up to your problems, you have very much worse problems.
"Britain has taken decisive action, we now need the eurozone to do the same."
The OBR said that although it was not forecasting a recession for the UK, a recession in the eurozone would make it more likely that such a crisis could occur in Britain.
The BBC's political editor Nick Robinson said the severity of the economic downturn - and the need to make huge savings - might well force politicians to look much more fundamentally at the role of the state and the nature of wealth distribution.
Difficult questions they have previously shied away from - like how the NHS is funded, the size of the welfare state and the universality of benefits like winter fuel payments - may now have to be considered, he added.
In the Autumn Statement, Mr Osborne announced that public sector pay rises would be capped at 1% for two years - after a current two-year freeze - and the rise in the state retirement age to 67 would be brought forward by eight years to 2026.
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, and pension credit will also increase.
Other announcements included an increase in the bank levy, a 50% discount for social housing tenants who want to buy their own home, and a cancellation of a 3p rise in fuel duty in January.
Mr Osborne also went through a series of schemes aimed at boosting the UK's flagging economy.
These include a £40bn "credit easing" scheme to underwrite bank loans to small businesses and plans for £5bn spending on big infrastructure projects over three years.