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Recovery will be longer and harder than we had hoped, chancellor tells recalled session of parliament The chancellor has used his emergency statement to parliament to say that recent events in the global economy had “vindicated” the government’s deficit reduction programme. He put in a bullish performance after the Bank of England downgraded its UK growth forecasts for the fifth time this year. George Osborne made the second of two emergency government statements after nine days of economic upheaval and one day after the Bank of England governor, Sir Mervyn King, warned of more economic “turbulence” ahead, saying “headwinds were becoming stronger by the day”. In his statement, Osborne acknowledged this squall of bad economic news, saying the FTSE had fared badly in the past month. “The huge overhang of debt means the recovery will be longer and harder than we had hoped,” he said. “This is the most dangerous time for the global economy since 2008, and we should be clear about that.” But he sought to turn events to his advantage, telling parliament Britain had become a “safe haven” for stock markets in recent days, with the unpredictability of stocks making an investment in UK bonds more attractive. Referring to recent market turbulence, he said: “The market for our government bonds has benefited.” The chancellor showed that Britain had now become a better credit risk than Germany according to the present market assessment. This was because of Britain’s deficit reduction package, which had reassured international markets the government had finances under control, and because bond traders were not angling to downgrade Britain’s sovereign credit worthiness. That bond yields were down was a “huge vote of confidence” in the UK, Osborne said. He spoke of “the reckless folly of those who said we were cutting too far and too fast”. “[It] vindicates the decision to get ahead of the curve, while other countries have remained paralysed. Ours is an unwavering commitment and we will not abandon Britain to the financial whirlpool.” Responding in the commons chamber, shadow chancellor Ed Balls said Osborne’s optimistic interpretation of bond yields going down had a worrying precedent. He pointed out that Japan’s bond yields fell before they went through a decade of stagnation, a fall which, he suggested, showed that international investors did not expect much future growth. The chancellor returned from his holiday in California, and the prime minister returned from Tuscany, to address MPs’ concerns about rioting as well as the world economy. The Bank of England cut its growth forecast for the year 2011 from 1.8% to 1.5%. UK manufacturing figures were also worse than expected: output fell by 0.4% in June. On Wednesday, the FTSE 100 fell 3% and it was rumoured on Thursday morning, hours ahead of the chancellor’s address, that France could see a credit downgrade similar to that announced by Standard & Poor’s in America, whose ratings downgrade triggered the latest share fall. In an attempt to avert such a downgrade, French president Nicolas Sarkozy said he would be announcing plans to reduce his country’s budget deficit within the week. Osborne said 500,000 private sector jobs had been created in the British economy during the last 12 months. He also mounted a trenchant defence of the government’s deficit reduction plan, saying that without it Britain might also risk having its credit worthiness downgraded, as America’s had been last week . He said the Treasury, Bank of England and Financial Services Authority were in agreement that British banks were sufficiently capitalised to deal with any second credit crunch on the continent. Balls warned Osborne that events could push the world economy into a repeat of the 1930s depression and said his constituents wondered whether the chancellor was either “deeply complacent or in deep denial about the state the UK economy is in”. Britain’s growth had been “stagnant” over the last nine months. Osborne had previously suggested in an article for the Daily Telegraph that fresh measures would be brought in in the autumn to attempt anew to galvanise the British economy, writing “we will take further action this autumn. Indeed this crisis provides an opportunity to make some difficult trade-offs in favour of growth that might get parked in the ‘too difficult’ box in calmer times.” Among elements already in place, Osborne pointed to lower corporation tax rates, less regulation for small firms, welfare reform, planning changes and lower taxes for entrepreneurs. In the piece, Osborne defended the government’s cuts programme because of the market confidence it has afforded. He wrote: “In the latest phase of financial turbulence, the interest rates on our government debt have fallen as market participants hail UK assets as a safe haven. The alternative of more spending and yet more borrowing is now frankly ludicrous and places those who advocate it on the outer fringes of the international debate.” On Wednesday King said: “There are a number of headwinds to world and domestic growth, not least the private and public debt overhang. And these headwinds are becoming stronger by the day.” Economic growth (GDP) Bank of England Economics Inflation Interest rates Banking Global recession Global economy Financial crisis George Osborne Liberal-Conservative coalition Bonds Mervyn King Ed Balls House of Commons European debt crisis Stock markets Market turmoil Allegra Stratton guardian.co.uk