LONDON (Reuters) ? The British government unveiled sharply lower economic growth forecasts on Tuesday and said it would take longer than hoped to wipe out its deficit, meaning that tough austerity measures would extend beyond 2015.
Finance Minister George Osborne warned that the British economy risked getting dragged into recession if the euro zone debt crisis was not solved.
"If the rest of Europe heads into recession it may prove hard to avoid one here in the UK," he told parliament.
"Much of Europe appears to be heading into recession caused by a chronic lack of confidence in the ability of countries to deal with their debts. We will do whatever it takes to protect Britain from this debt storm while doing all we can to build the foundations of future growth," he said.
The economy was now forecast to grow by only 0.7 percent next year, way below a March budget forecast of 2.5 percent, Osborne said, presenting figures from the independent Office for Budget Responsibility.
Growth was expected to recover to 2.1 percent in 2013.
The prospect of years of fiscal austerity will fuel anger among unions on the eve of a one-day strike by 2 million public sector workers over government spending cuts that will make them pay more and work longer for their pensions.
Borrowing will fall much less than expected because of slower economic growth, erasing any room for error in the coalition government's deficit reduction plan.
Osborne said the independent Office for Budget Responsibility forecasts showed borrowing would fall to 79 billion pounds ($123 billion) in 2014/15, against a March budget forecast of 46 billion pounds.
For next year, public sector net borrowing is now forecast to total 120 billion years, up from the March prediction of 101 billion. The structural deficit would be erased by 2016/17, Osborne said.
RECESSION RISK
The new figures bring the government broadly into line with independent forecasters.
The OECD rich nations' economic think-tank said on Monday that Britain will slip back into a modest recession early next year. It lowered its 2012 growth forecast to just 0.5 percent and urged the Bank of England to expand its money-printing program.
Despite fears that the country is being pushed back into recession, the government will not fundamentally change tack with no additional borrowing or savings announced.
Britain has enjoyed record-low borrowing costs thanks to its perceived status as a safe-haven from the euro zone debt crisis, which helps alleviate the pressure on public finances.
The yield on ten-year gilts has been trading at 2.3 percent, well below the 3.8 percent average rate projected by the OBR in March, resulting in a total debt interest saving of 22 billion pounds up to 2015/16, Osborne said.
What stimulus there is, is likely to come from monetary policy.
The Bank of England will pump an additional 75 billion pounds into the economy in coming months, a Reuters poll indicated on Tuesday, taking the total to 350 billion as it tries to revitalize growth.
"The UK is partway through a 'lost decade', and I expect that 2012 will be another difficult year," said Michael Saunders at Citi, who expects the total BoE spend to be at least 500 billion pounds -- the highest forecast in the poll.
Recognizing that he has little scope to alter Britain's short-term economic prospects, Osborne focused on measures that will boost growth in the longer term, such as promoting lending to small businesses and encouraging private sector investment in infrastructure.
He plans to tap British pension funds to provide the bulk of up to 30 billion pounds of investment in building projects, while the government will underwrite 20 billion pounds of loans to smaller companies struggling for credit.
(Editing by Mike Peacock)
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