Just hours after the chancellor pledged to “do whatever it takes to protect Britain from the debt storm”, the Office for Budget Responsibility (OBR) said it now expected public sector net debt to peak at a staggering 78 per cent of GDP in 2014.
Osborne responded to the worsening fiscal position by announcing plans to cut public spending in real terms by an extra one per cent in both 2015 and 2016, extending the era of austerity well into the next parliament and stamping out any hopes of tax cuts before the next election.
Fitch, one of the big three ratings agencies, warned that the UK was now the most indebted triple-A country in the world, with the exception of the US, which was stripped of its gold-plated credit rating by S&P earlier this year.
Fitch added that in the event of further financial shocks such as a meltdown in the Eurozone, Britain would be unable to retain its triple-A rating without more austerity measures.
Osborne admitted as much when he delivered his Autumn Statement to the House of Commons yesterday, warning that “if the rest of Europe heads into recession, it may prove hard to avoid one here in the UK”.
The OBR slashed its growth forecast for next year by 1.8 per cent to 0.7 per cent. It then pencilled in growth of 2.1 per cent in 2013 and 2.7 per cent in 2014, although independent economists warned that these predictions were far too optimistic.
The deterioration in the public finances left the chancellor with little room to announce new policies to boost anaemic economic growth. He saved £1bn a year by scrapping plans to increase child tax credits, while a freeze in the working tax credit will save around £275m a year.
Capping public sector pay rises at one per cent in 2013 and 2014, after the current freeze ends, will save around £1.8bn over the course of the parliament.
Osborne used the savings in current spending to announce £5bn of investment in infrastructure projects and a raft of micro-measures designed to help entrepreneurs and small businesses.