- UK austerity drive set to continue until 2018 as debt reduction target is missed
- Rating agency Fitch said missing the target 'weakens the credibility of the UK's fiscal framework'
- Fitch and Moody's have put negative outlooks on the UK's rating this year
Britain will prolong its austerity drive until 2018 as the country's independent budget watchdog slashed its economic growth forecasts and UK finance and economy minister missed one of his targets to improve the public finances.
George Osborne, the chancellor, said Britain was still determined to eliminate its budget deficit even though it would take longer than he first thought. "Britain is on the right track and turning back now would be a disaster," he told parliament as he presented his mini-budget to the country.
Britain has become the global poster-child for deficit-reduction, but feeble economic growth and deteriorating public finances this year have put the coalition government under pressure. Mr Osborne's critics claim austerity has proved self-defeating.
The independent Office for Budget Responsibility predicted the UK economy would shrink slightly this year and grow less over the next four years than it had forecast in March. Robert Chote, chair of the watchdog, said: "What's striking is the weakness of the recovery over an extended period of time."
As a result of this bleaker outlook, Mr Osborne said Britain would miss by a year its target for debt to fall by 2015-16 as a percentage of national income. He also said he would extend austerity by another year to 2017-18 to close the cyclically adjusted current budget deficit.
"The public know that there are no miracle cures," Mr Osborne said on Wednesday. "Just the hard work of dealing with our deficit and ensuring Britain wins the global race."
Markets barely reacted to the news, which was widely expected. The UK's benchmark 10-year bond yields edged down to 1.78 per cent, and the pound was largely flat against the US dollar.
The chancellor's statement did nothing to dispel fears that the UK could be stripped of its triple A credit rating. Both Moody's and Fitch, two of the three major rating agencies, put negative outlooks on the UK's rating this year.
"In our view, missing the target weakens the credibility of the UK's fiscal framework, which is one of the factors supporting the rating," Fitch said on Wednesday.
The coalition government announced measures that would squeeze the rich and the poor to help motorists and middle-income workers. It also said corporation tax would fall to 21 per cent in April 2014.
Mr Osborne cut the rate at which benefits for working age people will increase each year, pushed more people into paying a higher rate of income tax, and reduced tax relief for wealthy pension savers.
Additional reporting by Claire Jones