Age of austerity extended to 2018

Austerity measures are to be extended for a further year to 2018, Chancellor George Osborne has announced, as Britain's faltering economy went into reverse.

In a bleak autumn statement to the House of Commons, the Chancellor announced a £3.7 billion squeeze on welfare and a £1 billion raid on the pensions of the wealthy, as he admitted that the nation's deficit will not be eliminated until well into the next Parliament.

He sought to sweeten the pill by scrapping a planned 3p-a-litre rise in fuel duty which had been due to come in January, cutting corporation tax by 1% and introducing changes to tax thresholds which will see earnings below £9,440 taken out of income tax altogether.

But he was forced to admit that the independent Office for Budget Responsibility now believes he will miss his target for debt to start falling as a proportion of GDP from 2015/16 - the year of the next general election.

The OBR downgraded its forecasts for GDP growth in each of the next five years, predicting that the economy will shrink by 0.1% in 2012, rather than growing by 0.8% as they expected in March.

On his other key target, Mr Osborne was able to boast that the state deficit will fall in each of the next five years. Having inherited borrowing of £159 billion in 2010, the coalition Government has brought it down to £108 billion this year, forecast to drop further to £99 billion next year and £31 billion by 2016.

But Labour said the Chancellor was only able to declare good news on borrowing because his figures include an expected £3.5 billion windfall from the auction of 4G telephone spectrum, even though it has not yet happened. Treasury aides said that this was a decision made by the OBR.

Shadow chancellor Ed Balls said that the OBR forecasts revealed "the true scale of this Government's economic failure" and showed that the UK was "falling behind in the global race" as a result of Mr Osborne's stewardship of the economy.

But the Chancellor told MPs: "It's taking time, but the British economy is healing."

He added: "Yes, the deficit is still far too high for comfort. We cannot relax our efforts to make our economy safe. But Britain is heading in the right direction. The road is hard but we're making progress."

Mr Osborne again ruled out the Liberal Democrat proposal for a "mansion tax" on expensive properties, but cut tax-free pension allowances from £50,000 to £40,000 a year - or £1.25 million over a lifetime - saving around £1 billion by 2016/17.

But Liberal Democrats were claiming success in preventing a feared freeze on benefit rates, and keeping the total saving on the welfare bill well below the £10 billion previously floated by the Chancellor.

Mr Osborne will legislate to break the traditional inflation link, which earlier this year saw benefits uprated by 5.2% and which the Chancellor said was not "fair" at a time when most people's salaries are rising much more slowly.

Increases in most working-age benefits - including Job Seekers Allowance, Employment and Support Allowance and Income Support, as well as elements of Child Tax Credit and Working Tax Credit - will be capped at 1% over the coming years, although benefits for disabled people and carers will continue to rise in line with inflation. Child benefit will be frozen next year before rising by 1% from 2014.

Labour said that benefit and tax changes mean that a working family with children on £20,000 a year will lose £279 a year from April.

A planned rise in the threshold for the lower rate of income tax is to be increased by £235 to £1,335, meaning that the first £9,440 of earnings will be tax-free from April next year and bringing the Government "within touching distance" of meeting its promise to raise personal allowances to £10,000 by the end of the Parliament.

But 400,000 more middle-income earners are set to be dragged into the 40% tax band by the process of "fiscal drag", as Mr Osborne raised £1 billion by uprating that threshold by just 1%.

As expected, the Chancellor announced cuts to Whitehall departments' day-to-day spending to partially fund £5.5 billion investment in infrastructure, including new schools, scientific research, flood defences and improvements to roads including the A1 in the north-east, the A30 in Cornwall and the M25 near the port of Tilbury.

Tax reliefs on investment in industrial plants rise tenfold from £25,000 to £250,000, in a £1 billion boost for business designed to kick-start growth.

The Federation of Small Businesses welcomed the initiative, along with moves designed to encourage investment in small firms and the scrapping of the 3p fuel duty rise.

"We accept that bold actions are needed to boost the economy and we hope we are on the right road to helping small firms," said FSB chairman John Walker. "The Chancellor has listened to many of our members' concerns, and has put forward proposals to address these issues."

Local councils were spared cuts next year, but must find savings of 2% in 2014/15.

Sir Merrick Cockell, chairman of the Local Government Association, said the Chancellor's plans were "unsustainable", warning: "Cutting council funding to help pay for nationally-administered economic stimulus programmes would be bad for local frontline services and makes no sense economically."

And TUC general secretary Brendan Barber said: "When you are self-harming you should stop, not look for better sticking plasters.

"With the economy still scraping along the bottom, unemployment set to rise and the Chancellor missing his own debt target, we need a fundamental change in direction, not more muddling through."