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Chancellor admits damage caused by credit crunch is forcing him to revise down already weak estimates for growth George Osborne insisted that the government would stick unwaveringly to its austerity plans, despite admitting that the long-term damage caused to the economy by the credit crunch was forcing him to revise down estimates for growth that were already weak. Raising fresh concerns that the UK is slipping towards a double-dip recession, the chancellor said Britain’s broken economic model meant there could be no return to “business as usual” and signalled that he would resist growing domestic and international pressure to boost activity by cutting taxes or slowing the pace of public spending cuts. Finance ministers and central bank governors from the G7 group of industrial nations are likely to call for fresh measures to stimulate growth when they meet in Marseilles this weekend following warnings this week from the International Monetary Fund and the World Bank of the dangers of seeking to cut budget deficits too hard. But the chancellor said the coalition had no intention of rethinking its tax and spending plans, and instead dropped a broad hint that he expected the Bank of England to take action against growing recessionary pressures with a second round of the electronic money creation process known as quantitative easing. His comments came on a fresh day of turbulence in the financial markets, which saw the Swiss central bank prompt fears of global currency wars when it stepped in to halt the franc’s rise against the euro. The shadow chancellor, Ed Balls, said Osborne was in denial about the damage being caused to the UK by increases in VAT and the toughest curbs on spending since the 1970s. Following a run of downbeat economic data, Osborne acknowledged that he would have to cut his forecast of UK growth when he delivers his autumn statement to parliament on 29 November, blaming the necessity for the fourth downgrade since the coalition came to power 16 months ago on the government’s legacy from Labour. Recoveries from financial crises were slower and choppier than recoveries from other types of recession, Osborne said. “So, while we have all had to revise down our short-term expectations over recent weeks, the only people who should be fundamentally re-examining their view of the world are those who thought that this time was different.” The chancellor will be discussing the slowdown in the global economy and plans for deficit reduction with the IMF’s Christine Lagarde on Friday before flying off to the G7 meeting. Both Lagarde and the president of the World Bank, Robert Zoellick, have issued strong statements this week about the risks that the recovery from the recession of 2008-09 is at risk of being aborted. Zoellick, speaking on Bloomberg TV, said: “We are moving into a dangerous period.” He also warned that the drive to cut national deficits across Europe could sink the region’s economic recovery. “Sometimes people hope that you can muddle through by providing financing and liquidity … they now recognise that’s not going to happen and instead what you see is with some of the weaker economies, that the austerity policies are pushing them into slower and slower growth and so this could be a downward spiral.” The United Nations has added its voice to the international organisations expressing concerns about the outlook for the world economy. Heiner Flassbeck, a former German finance minister and the director of the UN Conference on Trade and Development’s globalisation and development division, said the current economic situation was “extremely dangerous”. Speaking to AFP, Flassbeck said: “The best that could happen if we do nothing at this moment of time in the world economy is that we are looking [at] two lost decades, Japanese-like, in stagnation and deflation.” Most City firms believe that the economy – which has grown by 0.2% in the nine months to June – will continue to struggle. HSBC, one of Britain’s biggest banks, predicted yesterday that national output would expand by 1.1% in 2011 and 1.3% in 2012, the slowest recovery from recession since the second world war. Weak surveys for manufacturing, construction and services in the past week have increased the pressure on the Treasury and the Bank of England to provide a boost to growth, but Osborne said his strategy had ensured Britain had remained insulated from the sovereign debt crisis affecting other nations. “We had an emergency budget last summer on our own terms – not this summer on the market’s terms – unlike so many other countries. We have been ahead of the curve. We have been a safe haven in the sovereign debt storm. We have delivered record low interest rates for families, businesses and taxpayers. We can remain masters of our own destiny.” Osborne said ministers had always understood there could never be a return to the “business as usual” conditions that existed before the 2007 financial crisis. “We understood right from the beginning that the world of the boom years had changed beyond recognition,” he said. “We identified the problems and the risks – an overleveraged economy, an unsustainable budget deficit and a broken model of growth.” Balls said Britain faced a growth crisis. “Without strong growth and more people in work it will be harder to get the deficit down. That’s why we urgently need leadership from the chancellor on the world stage to agree a global plan for growth and a more balanced deficit plan here in Britain.” George Osborne Economic policy Ed Balls Recession Economic growth (GDP) Credit crunch Market turmoil Financial crisis Global recession Economics Nicholas Watt Larry Elliott guardian.co.uk