Chancellor of the Exchequer George Osborne has delivered a bleak survey of the economy in an annual speech to bankers in the City of London, warning that a "fundamental readjustment" was needed before the UK could recover.
Reaffirming his support for deficit reduction and rejecting calls for a 'course correction', Osborne said that "long term fundamentals" were behind the economic slowdown, and said that "a model of growth built on unsustainable debt" would not be rebuilt unchanged.
Signalling that forecasts for UK growth will be lowered when he delivers his autumn statement to parliament on November 27, Osborne said the recovery had been "slower and choppier" than in other recessions.
Osborne gave his speech as 20 academics signed a letter to the Financial Times calling on the chancellor to repeal the 50p tax rate.
The letter, signed by Dr DeAnne Julius, chairwoman of Chatham House and a founding member of the Monetary Policy Committee at the Bank of England along with academics from the LSE, the University of Cambridge and others, said that the 50p tax rate was "self defeating".
They said the tax levy, which was introduced by the previous Labour government and applies to high earners on an income over £150,000, "punishes" entrepreneurship.
"We are concerned that Britain's 50p income tax rate is doing lasting damage to the UK economy."
"It gives the UK one of the highest personal tax regimes in the industrialised world, making it less competitive internationally and making us less attractive as a destination for both foreign investment and talented workers.
Osborne has dropped hints before that he wanted to abolish the 50p tax. In a radio interview earlier this year, he remarked:
"I've said with the 50p rate I don't see that as a lasting tax rate for Britain because it's very uncompetitive internationally, and people frankly can move.”
While he did not address the 50p tax rate in his speech, Osborne rejected calls for a "course correction" on economic policy.
Recent figures on construction, services and retail spending have all been week. Official figures released last week show the economy grew just 0.2 per cent in the three months to the end of June.
"These are very unsettling times for the global economy," Osborne said in his speech at the Lloyd's of London's annual City dinner at Merchant Taylor's Hall. "This is not a normal economic recovery."
"We cannot just sit back and wait for numbers that went down to come back up, or for lost ground to be made up, as has happened many times in the past."
Britain was one of the worst affected countries during the crisis because it had the biggest expansion of debt over the past decade, Osborne said.
"That’s because we had the biggest housing boom, the most indebted families, the most leveraged banks and the biggest structural budget deficit.
"All the evidence from economic history suggests that, thanks to this overhang of debt, recoveries from financial crises are slower and choppier than recoveries from other kinds of recession."
Warning the bankers present to brace for change, Osborne outlined an international and a domestic plan for recover.
On the global front Osborne said that the underlying causes of the crisis needed to be addressed, but said each country had to react differently and play to its own strengths.
"We won’t win anything if we all just charge ahead in the same direction – indeed we’d just let in goals at the back.
"In particular, in many countries we would put at risk the low interest rates and supportive monetary conditions that are so crucial in recovering from a debt crisis.
"So we need a differentiated global response, with each country’s role calibrated to its economic situation."
Calling on the eurozone countries to follow the "remorseless logic" and accept a more intrinsic form of monetary union, he said that work needed to be done to increase oil supply and lower prices.
Closer to home Osborne said that the Financial Policy Committee would play a vital role in looking again at regulation, and said that there needed to be a balance between sustaining the financial sector without putting the economy at risk.
The Independent Commission on Banking will deliver its report on Monday. It is anticipated that the commission may recommend measures to split riskier investment banking from high street banks.
Osborne finished by paying tribute to the coalition government.
"That leadership is now as strong as ever despite the global financial storm," he said.