George Osborne has announced that fuel duty rises will be postponed and major investments will be made in small business lending, infrastructure and regional development, as the government attempts to restart economic growth.
The UK's growth is well off track, but the government said that it will meet its targets to reduce the structural deficit before the end of the current parliament.
According to the forecast from the Office for Budget Responsibility (OBR), the UK's gross domestic product (GDP) will be just 0.9% in 2011 and 0.7% in 2012, before recovering more strongly to 2.1% and 2.7% in 2013 and 2014, respectively.
"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," Osborne told the House of Commons. "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."
Osborne told the House that:
- Growth forecasts have been slashed to 0.9% in 2011, and 0.7% in 2012
- A 3p rise in fuel duty due in January has been cancelled
- £40bn will be made available in loan guarantees for small businesses
- Up to £10bn will be invested in infrastructure, with £20m more coming from pension funds
- £400m is to be made available for housing projects
- The child element of working tax credit is to be increased
- A 2% rise in train fares has been cancelled
- Public sector pay rises have been reduced from 2% to 1%
- The bank levy has been increased
The slippage in the growth figures, the OBR said, was due to a combination of weakening sentiment in the eurozone, external inflationary factors, including rises in energy and food costs, and evidence that the structural deficit - the part that is not directly affected by growth - was bigger than previously thought.
A failure to resolve the ongoing sovereign debt crisis in the eurozone could blow even that shallow growth off course, the OBR warned.
"If the rest of Europe heads into recession, it may prove hard to avoid one here in the UK," Osborne said. "We are now undertaking extensive contingency planning to deal with all potential outcomes of the euro crisis."
The independent economic body had originally built in forecasts of growth exceeding 2% by 2012. Those have now proved to be massively optimistic, with the Bank of England revising its outlook to below 1% for both 2011 and 2012 earlier in November.
The Shadow Chancellor Ed Balls said that the OBR's figures were proof that the government's "Plan A has failed an it has failed colossally."
In response, a proposed fuel duty rise of 3p in January has been cancelled, and a mooted 5p rise in August 2012 will now be trimmed to 3p.
The child element of working tax credit will be uprated in line with inflation, along with disability tax credits and working age benefits. However, child tax credits, which were due to be increased above inflation, will now not be. The pension age increase from 66 to 67 will be brought forward to 2026.
A 2% rise in train fares has also been cancelled.
Infrastructure, small business lending, regional development, youth employment and housing have all had billions earmarked for them in guarantees or direct investments as the Treasury relaxes its drive for cutbacks in a bid to get the economy moving.
The government is to create a £40bn guarantee facility for small business lending, with the books balanced by a reduction of £40bn in the Bank of England's asset purchase facility for corporate debt, which was largely underexploited. An additional £1bn will be made available to funds lending to mid-sized businesses, and an extra £1bn will be put into the Regional Growth Fund. Small businesses will see a holiday on business rates extended until April 2013, and two more enterprise zones will be created, taking the total to 24.
£500m will be invested in high-tech, science-led industries, and larger companies will be given new tax credits on research and development by 2015.
£5bn will be released to fund infrastructure projects in the next three years, with a further £5bn over the next decade. £20bn further investment will come from UK pension funds.
Investors in start ups will get further tax relief, as the enterprise investment scheme is extended. Investors putting up to £100,000 into qualifying businesses will get 50% income tax relief, and in 2012, the government will waive capital gains tax on profits made in such businesses.
The chancellor had already made many of the plans to promote growth public ahead of Tuesday's statement, pre-empting the announcement from the OBR on just how big a hole had opened up in the coalition's deficit reduction plans.
The government will borrow more than anticipated in order to fund these programmes, but additional funds will be raised by an increase of the bank levy to 0.088%, and loopholes in asset-backed pension schemes will be closed - although Osborne repeated his resistance to the European idea of a tax on financial transactions.
Public sector pay rises - expected to be 2% after freezes end over the next two years - will now be just 1%, Osborne said.
The foreign aid budget will continue to increase, but will be reined in to prevent it from exceeding its target of 0.7% of GDP, he added.
Debt will peak at 78% of GDP in 2014/15, according to the OBR.
While the government may seem to be deviating from its deficit reduction strategy, the government's original plans saw only £20bn come from cuts, with around £115bn derived from higher revenues, according to analysis from Tullet Prebon. This latter component is only possible if the economy starts to rebound, so kickstarting growth was always going to be an imperative, even if it came at the cost of slippage on spending.
However, the balance is a difficult one. With so-called "bond vigilantes" - speculative investors - quick to bet against countries with high debt who may struggle to pay back, and with rating agencies equally ready to cut their ratings of sovereigns whose plans slip, keeping at least the appearance of austerity is vital.
What the market thinks matters, because the UK government always planned to borrow more. Keeping the cost of that borrowing down is important to keep the country solvent - as the Italian government found out earlier in the month.
Pumping money into infrastructure - £5bn, with as much as £25bn in additional funding from the private sector - has been suggested as a relatively 'quick win' for the Treasury.
Infrastructure is an economic enabler, in theory reducing costs for businesses, aiding logistics and opening up new markets or sites. It is also a relatively safe investment for long term investors, providing predictable returns over a long time horizon, making it relatively attractive for pension funds.
Small businesses, too, are a major focus, and one that has cross-party support. The extent to which the lack of competitiveness and growth in the UK's small- and medium-sized enterprise (SME) sector is down to the availability of credit is uncertain, but "credit easing" - a pledge that the Treasury will underwrite loans - could see banks become more willing to open up their books.
"No government has attempted anything as ambitious as this before," Osborne said of the plans. "We will not get every detail perfect first time round - but we don't want to make the best the enemy of the good. With the strain on the financial system increasing, the important thing is to get credit flowing to Britain's small businesses."
However, with the backdrop of turmoil in the eurozone, anaemic growth and poor consumer sentiment, banks have been de-leveraging more broadly. The banking system in the UK is less exposed to the sovereign crisis on the mainland than its counterparts in the single currency area, but it is still vulnerable to shocks - such as a drying up of liquidity. Likewise, a slowdown in the eurozone would make an export-driven recovery.
The markets have reacted positively to the chancellor's plans. Yields on UK debt are down, but that could just as well be due to the continued - and possibly worsening - situation in the eurozone, where even Germany seems to be being dragged into the mire.
David Kuo from the financial analysis site the Motley Fool warned that the financial measures could drive inflation.
"Many people view the Autumn Statement by the Chancellor as fiscally neutral – a robbing Peter to pay Paul exercise," he said. "But that is just not the case. The credit easing and monetary easing measures, which are designed to keep the economy ticking over, could be highly inflationary. Inflation is a tax. It is no different to any other tax, but this one is designed to pare down the national deficit through erosion."
Business groups, including the Confederation of British Industries (CBI), the Federation of Small Businesses (FSB), the Forum of Private Business (FPB) and the London Chamber of Commerce and Industry (LCCI) welcomed the statement.
“This autumn statement works with the realities of today and provides an imaginative framework for UK businesses as it strives to secure growth and jobs. This is 'Plan A plus' in all but name," the CBI's director general John Cridland said. “The downgraded forecasts and outlook were no surprise, but the Eurozone crisis is still hanging over us. The Government’s dogged commitment to budget deficit reduction remains the only way to maintain the UK’s triple A credit rating and low interest rates on international money markets."
“The most important task the Chancellor faced today was to set a clear strategy for growth that would provide certainty to the UK’s businesses and the confidence they need to expand, and to a large extent that was achieved," Colin Stanbridge, chief executive of the LCCI, said. “Firms understand the importance of adhering to the austerity programme but were looking for reassurance that the government is doing everything it can within current spending plans to encourage growth."
However, others warned that while capital investment and relief for some working families was welcome, the balance between helping firms and tightening household finances may not have been struck.
“This mini-Budget does not address the main problem facing UK economy in the short-term: the shortage of aggregate demand. Many of the Chancellor’s collection of small measures are welcome but it is wrong to squeeze the living standards of lower and middle income families relying on tax credits in order to pay for lower increases in fuel duty," Nick Pierce, director of the Institute for Public Policy Research (IPPR) said.
Gillian Guy, chief executive of Citizens advice, added: “The Chancellor has broken the promise he made in last year’s Budget to protect families on the lowest incomes from the impact of last year's harsh cuts by increasing child tax credits above inflation, leaving them now with no protection at all. It’s astonishing that George Osborne could think it fair that the lowest paid families who can least afford it should pick up the bill for kick-starting the recovery at a time when they are battling with hikes in fuel bills, rising rent and food costs. Make no mistake, this means children in the poorest homes are at risk of going cold and hungry to pay for the new schemes the Chancellor has announced today."