Britain Lowers Growth Forecast and Extends Austerity Measures

On the eve of a huge strike by public sector workers to protest austerity measures, the British government said Tuesday that it was falling behind with its deficit reduction plan and that the measures would drag on for two more years.

The chancellor of the Exchequer, George Osborne, said Tuesday that because of the slowdown in the euro zone, British economic growth this year and next would be slower than forecast in March and “debt will not fall as fast as we’d hoped.”

He added that Britain could avoid a recession next year only if the euro zone found a solution to its current crisis.

“We’ll do whatever we can to protect Britain from this debt storm,” Mr. Osborne told a packed Parliament. “If the rest of Europe heads into a recession, it may be hard to avoid one here in the U.K.”

The biggest public sector unions in Britain called for a strike on Wednesday. It is expected to cause major delays at airports and hospitals and shut some schools.

More than two million people, including teachers and other government employees, are expected to go on strike over a dispute with the government about pensions, according to the Trades Union Congress.

In Parliament, Mr. Osborne called on the unions to reconsider the strike action and return to the negotiating table, asking why they were “putting jobs at risk.”

“Call off the strike,” he said.

The unions said the strike would go ahead as planned. Len McCluskey, general secretary of the trade union Unite, criticized Mr. Osborne’s economic strategy and compared him to “a pilot who has put his plane into a tailspin and is now wrestling desperately with the controls as the aircraft rapidly loses height.”

The government said British households, which are already squeezed by higher food and electricity prices, would have to endure an additional two years of austerity measures, now until 2017. The economy is growing slower than forecast, hurting Mr. Osborne’s initial 2010 plan to eliminate the budget deficit within five years.

It would also require Britain to borrow an additional £111 billion, or $172 billion, through 2015, a step Mr. Osborne was eager to avoid. The austerity measures would now drag on far beyond the next general election, currently scheduled for 2015.

The British economy will grow 0.9 percent this year, less than the 1.7 percent predicted earlier, and 0.7 percent next year, the Office for Budget Responsibility forecast Tuesday. The agency predicted that the economy would then pick up and grow 2.1 percent in 2013. Debt as a share of gross domestic product would peak at 78 percent in the fiscal year ending in 2015, higher than the 71 percent initially predicted.

Amid fierce criticism from the opposition Labour Party, Mr. Osborne said Tuesday that he would stick to his austerity plan, which includes more than 600,000 job cuts in the public sector and other spending curbs, but that it would still take longer for the debt load to shrink.

Because of that, the government said it would cap pay increases for public sector workers at 1 percent for two years after the end of the current pay freeze.

The step was part of a small set of measures presented Tuesday, which also includes an increase in a bank tax, to generate extra revenue to invest in infrastructure projects and to fight youth unemployment.

But it added to the anger of workers’ representatives, who said the government was now not only “raiding” pensions but wages as well.

Howard Archer, chief economist for Britain at IHS Global Insight, said Mr. Osborne lacked the room for maneuver to offer any investments or tax cuts that could help the economic recovery.

“The economy is staring recession in the face again; he has no money to spend and events in the euro zone pose major downside risks over which he has no control,” Mr. Archer said.

The Labour Party said the new forecast meant that Mr. Osborne’s strategy to cut the budget “is in tatters” and that “plan A has failed colossally.” The Labour Party called on Mr. Osborne to “change course before it’s too late” and scale back an aggressive debt reduction plan that was choking off the economy.

But Mr. Osborne argued that an early adoption of the deficit plan last year helped Britain to keep its borrowing costs low and avoid problems faced by Greece or Italy, where borrowing costs became unsustainable.

Unlike the United States or the members of the euro zone, Britain already has a far-reaching austerity plan along with interest rates at record-low levels. It also has its own currency, which helps keep British exports to the euro zone relatively inexpensive.

When Germany’s 10-year bond yields last week rose above Britain’s for the first time in more than two years, it was widely interpreted by the British government as a vote of confidence in Britain’s budget reduction efforts.

But the damped outlook released Tuesday by the budget office — combined with warnings Monday by the Organization for Economic Cooperation and Development that Britain might fall back into a recession — put pressure on Mr. Osborne’s plan.

Mervyn A. King, governor of the Bank of England, also warned Monday that Britain was increasingly threatened by the crisis in the euro zone.

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