Britain's Treasury chief has announced plans to put more money directly into the economy to stimulate lagging growth, just as an international survey suggests the country will slip back into a recession.
The Organization for Economic Cooperation and Development said Monday that it expects the U.K. economy to contract in the current quarter and in the first three months of 2012. For all of next year, it forecast U.K. GDP to grow by just half a percent.
Britain has struggled to recover from a deep, 18-month recession which ended in the last quarter of 2009, and the turmoil in the eurozone has frustrated hopes of an export-led recovery.
Bank of England governor Mervyn King told lawmakers Monday that economic growth would be flat for the next six months as the unfolding eurozone crisis threatened the U.K.'s recovery.
King told the Treasury Select Committee that "painful adjustments" need to be made regardless of how the problems in the 17-nation currency bloc pan out _ but it would be better for changes to be made in "orderly way than a disorderly way."
With the outlook worsening and public sector workers preparing for a one-day strike on Wednesday, Treasury chief George Osborne has outlined some of his plans to get more loan funding flowing to small and medium-sized industries and to support employment by increasing investment in infrastructure.
Osborne says he can do that without increasing overall spending, thus keeping the government deficit-cutting drive on track. Since taking power last year, Prime Minister David Cameron's government has made deficit-cutting a priority; it has blamed the country's economic problems on the debts run up by the previous Labour Party government.
Osborne will confirm his plans on Tuesday in a speech to the House of Commons, a day before a one-day strike by public sector workers who are angry about changes to their pension plans.
"The OECD is predicting deep recessions in many European countries. That is a challenge for Britain," Osborne said Monday. "What we can do with our policies is take Britain safely through this storm."
Also on Tuesday, the independent Office for Budget Responsibility publishes its latest economic forecast, and it is expected to downgrade expectations for growth to around 1 percent for the current year and next year, in line with the latest forecast from the Bank of England. In March, the office had predicted growth of 1.7 percent this year and 2.5 percent for 2012.
That means that the government has less money to spend, if it is intent on sticking to its deficit reduction targets.
The government is also under pressure because of rising unemployment, currently at a 15-year high of 8.3 percent, and inflation still at 5 percent. The OECD predicts that U.K. unemployment will hit 9 percent by the end of next year and stay there through 2013.
Osborne plans to devote another 5 billion pounds ($7.8 billion) to improving infrastructure, by diverting funds from other government programs. He aims to raise another 20 billion pounds for infrastructure by allowing pension funds to invest directly in projects.
Danny Alexander, the No. 2 Treasury official, said Monday that much of that 5 billion pounds could be raised by using unspent money in various departments.
"There are some programs such as, for example, the carbon capture and storage scheme, where the negotiations failed to reach an agreement, where some of that money can be reallocated in this spending review," Alexander said.
Osborne also announced a National Loan Guarantee Scheme which is intended to make more money available to smaller businesses, those with turnover of less than 50 million pounds a year.
Under this program, the government would guarantee a bank's wholesale borrowing which is used for loans to small and medium-sized businesses. This is hoped to shave a point off the interest rate on loans.
Banks would still absorb the loss for loans which aren't repaid; the government guarantee kicks in only of the bank cannot repay its wholesale lending debt.
Plans for additional investment follows the Bank of England's decision in October to inject 75 billion pounds into the economy through purchases of government bonds and other high-quality assets. The program, known as quantitative easing, is intended to free up credit markets and keep interest rates low.