Osborne Tries to Sweeten Pill for Austerity Britain

Oli Scarff | Getty Images

Chancellor of the Exchequer George Osborne poses for photographers outside 11 Downing Street.

British finance minister George Osborne presented his half-yearly budget statement to parliament on Wednesday.

"It's taking time, but the British economy is healing. After the biggest financial crash of our lifetimes, people know that we face deep seated problems at home and abroad.

"At home, we live with the legacy of a decade of debt and the failure to equip Britain to compete in the modern world. And we face a multitude of problems from abroad.

"The deficit has fallen by a quarter in just two years. And today's figures show it is forecast to continue to fall," he said.

Osborne said the British economy has performed less strongly than expected and a crisis in the euro zone will constrain growth for several years.

The economy will grow 1.2 percent next year and 2.0 percent in 2014, according to revised projections from the Office for Budget Responsibility, Osborne said. 2015 and 2016 forecasts were revised down to 2.3 and 2.7 percent respectively.

In March, the government's forecasting body said the economy was set to grow 2.0 percent next year, and accelerate to 2.7 percent in 2014, and to 3.0 percent in the following two years.

A Reuters poll taken last month predicted growth of 1.1 percent next year and 1.7 percent in 2014.

Britain may have escaped its second recession in four years last quarter but growth is seen marginal at best in the next 12 months. However, a slew of recent data has put the current quarter's meager expansion expectation in danger.

Figures published this week have made grim reading for Osborne and have pointed to a possible flat fourth quarter.

The chances of Osborne masterminding a strong recovery in time for voters to feel the benefits before a 2015 election appear to be shrinking.

"The picture of stagnation is a problem," said Rob Wood, an economist at Berenberg Bank, arguing that Osborne will probably have to announce more austerity for the years after the 2015 election. "Deficit reduction has gone into reverse this year."

The economy grew one percent in the third quarter, bouncing back from three quarters of decline, but few expect a roaring recovery next year without some solution to the protracted debt crisis in the euro zone - Britain's main trading partner.

In the absence of the strong growth predicted when Osborne took the reins of the Treasury in 2010, he has been forced to extend spending cuts well beyond the next election. He may have to stretch out those cuts even further into the future.

Back in March, the OBR forecast growth of 0.8 percent this year, 2 percent in 2013 and nearly 3 percent thereafter. Economists polled by Reuters now expect output to fall 0.1 percent this year, followed by 1.1 percent growth in 2013 and 1.7 percent in 2014.

Critics accuse Osborne of strangling growth by cutting government spending too fast and, in turn, scuppering any hopes of reaping the tax revenues needed to swiftly deal with Britain's budget deficit - which hit a record above 11 percent of GDP shortly before the 2010 election.

Osborne's supporters say that changing course now would unsettle financial markets, drive up the cost of borrowing and put Britain's economy in even greater jeopardy.