The British government blamed the euro crisis for a big downgrade of the country's growth projections and warned that it will only achieve its deficit-reduction goals if European leaders deliver a big, bold solution soon.
Britain's Treasury chief George Osborne said Tuesday that Europe's third-largest economy was being buffeted by the slowdown in the eurozone. Though Britain retains the pound, having opted out of joining the euro, around 50 percent of the country's exports go to the 17-nation eurozone.
"If the rest of Europe heads into recession, it may prove hard to avoid one here in the U.K.," Osborne told the House of Commons.
A number of economic indicators have shown that the eurozone is heading for recession in the wake of a crippling debt crisis that's shown alarming signs of spreading from the relatively small economies of Greece and Ireland to much-bigger Italy and Spain.
Given the sharp deterioration in the eurozone, Osborne said the government was "undertaking extensive contingency planning to deal with all potential outcomes of the euro crisis."
Osborne told lawmakers that the independent Office for Budget Responsibility now expects Britain's GDP to grow by 0.9 percent this year, around half the 1.7 percent rate predicted in March. For next year, the OBR predicts growth of 0.7 percent, sharply down from the 2.5 percent prediction in March.
Its forecasts are in line with the Bank of England though slightly better than Monday's projection by the Organization for Economic Cooperation and Development that showed Britain already slipping into a mild recession.
"Even though we believe there is an equal chance that growth will come in above or below our central forecast, the probability of a much worse outcome than the central forecast is greater than the probability of a much better one," the budget office warned.
Nevertheless the lower growth forecasts mean that government tax revenues will likely be lower than anticipated and that spending on such things as unemployment benefits will be higher.
Osborne argued that the independent analysis of the OBR found the debt challenge was "even greater than we thought because the boom was even bigger, the bust even deeper and the effects will last even longer."
As a result, he said the structural deficit _ the bit that doesn't go away when the economy improves _ won't be eliminated until 2016-17, later than previously thought.
He also said the debt-to-GDP ratio at 67.5 percent this fiscal year would increase to 78 percent in 2014/15 before falling. Though rising, Britain's debt burden is below many euro countries' equivalent rates, including Germany's.
In response, Osborne outlined a series of fresh spending cuts to keep the government on track. He also risked a fresh clash with the unions, who are preparing a big walkout Wednesday, by announcing that public sector pay rises will be capped at 1 percent for two years.
Job losses in the public sector are also expected to be way more than anticipated. The budget office said it anticipates 710,000 by early 2017, a big rise from the previous forecast of 400,000 by the first quarter of 2016.
Osborne became Britain's finance chief in May 2010 after an inconclusive election that saw the Conservative Party govern only in coalition with the Liberal Democrats. Deficit reduction has been the main economic purpose of the government after the banking crisis of 2008 pushed the British economy into recession and took a big swipe at the country's public finances.
Markets have so far given the government the benefit of the doubt, and the country's borrowing rates in the markets remain very low, especially in contrast to a number of the euro countries. Its ten-year yield stands at 2.06 percent, even lower than Germany's 2.33 percent.
The opposition Labour Party said the latest growth projections exposed the "truly colossal failure " of Osborne's focus on cutting spending.
"With prices rising, with unemployment soaring, families, pensioners and businesses already know it's hurting," said Labour's economic spokesman Ed Balls. "With billions of pounds more in borrowing to pay for rising unemployment, today we find out the truth: it's just not working."
Even after Tuesday's downgrades, many analysts think that the new growth projections are too rosy and that more spending reductions may have to be considered in the years ahead.
"Looking ahead, we expect further growth downgrades to push the borrowing forecasts even higher in future budgets and statements, deepening concerns about the U.K.'s fiscal position and testing Mr. Osborne's commitment to his own rules," said Jonathan Loynes, chief economist at Capital Economics.
Osborne offered a few treats for taxpayers: he canceled a rise in petrol tax due in January, curbed rises in rail fares and found more money for early education, infrastructure construction, state pensions and some benefits. As previously announced, he promised a 20 billion pounds ($31 billion) program to underwrite loans to small and medium-sized businesses.
He also raised the bank levy _ charged against the balance sheets of major banks _ from 0.075 percent to 0.088 percent _ but he repeated his opposition to a tax on financial transactions, calling that "a tax on pensions."
Osborne appealed to unions representing two million public sector workers to cancel a one-day strike set for Wednesday.
"Call off the strikes tomorrow. Come back to the table," Osborne appealed to the unions, which are angry about proposed changes to pensions.