George Osborne has signalled that the government would stick to its hardline deficit reduction strategy despite being forced to revise down his growth forecasts for the economy following the slowdown of recent months.
The chancellor said the coalition's tax increases and spending restraint had been designed to allow interest rates to remain low — a clear hint that he would back a second round of money creation from the Bank of England through the quantitative easing process.
Speaking at Lloyd's of London, the chancellor said: "We warned repeatedly that the recovery would be choppy. And we set in train a plan that was comprehensive and clear in its vision, but also flexible enough to withstand shocks along the way.
"A plan for fiscal responsibility to bring unsustainable government borrowing under control, so that monetary activism can allow interest rates to stay lower for longer. The plan we have set out is designed in tough times for tough times. It is the rock of stability upon which any sustainable recovery depends and we will hold to it."
Following a run of downbeat economic data, Osborne acknowledged that he would have to cut his forecast of UK growth when he delivers his autumn statement to parliament on 29 November. He said recoveries from financial crises were slower and choppier than recoveries from other types of recession.
"So, while we have all had to revise down our short term expectations over recent weeks, the only people who should be fundamentally re-examining their view of the world are those who thought that this time was different."
Most City firms believe that the economy — which has grown by a total of 0.2% in the nine months to June — will grow at barely more than 1% this year, and will continue to expand sluggishly in 2012. Weak surveys for manufacturing, construction and services in the past week have increased the pressure on the Treasury and the Bank of England to provide a boost to growth.
Christine Lagarde, the managing director of the International Monetary Fund and Robert Zoellick, the president of the World Bank, have both warned this week of the dangers of governments cutting deficits too aggressively, but Osborne said his strategy had ensured Britain had remained insulated from the sovereign debt crisis affecting other nations.
"We had an emergency budget last summer on our own terms – not this summer on the market's terms – unlike so many other countries. We have been ahead of the curve. We have been a safe haven in the sovereign debt storm. We have delivered record low interest rates for families, businesses and taxpayers. We are not immune from what happens on our doorstep. But we can remain masters of our own destiny."
Osborne said ministers had always understood that there could never be a return to the "business as usual" conditions that existed before the financial crisis of 2007.
"This government has never thought that this time would be different," he said. "We understood right from the beginning that the world of the boom years had changed beyond recognition. We identified the problems and the risks – an overleveraged economy, an unsustainable budget deficit and a broken model of growth."
Ed Balls, the shadow chancellor, said: "It's time George Osborne got out of his denial and admitted that Britain now faces a growth crisis. And he should listen to the head of the IMF and one of the largest investment funds in the world who have warned that cutting too far and too fast risks economic recovery.
"Without strong growth and more people in work it will be harder to get the deficit down. That's why we urgently need leadership from the chancellor on the world stage to agree a global plan for growth and a more balanced deficit plan here in Britain."
