The economy shrank by 0.3 percent in the last three months of 2012, and many analysts have predicted another contraction in the first quarter of 2013. That would put the U.K. back into a recession â¿¿ technically defined as two consecutive quarters of economic contraction.
Osborne admitted that the recovery was taking "longer than anyone hoped," and that problems in Europe were holding Britain back. The 17 European Union countries that use the euro account for around 40 percent of British exports and many of them are in recession, some of them severe. The current crisis in Cyprus is hardly going to help inspire confidence in the eurozone.
"We are still very exposed to what happens on the continent," said Osborne, who confirmed that British military and government personnel on the island would not lose out if a raid on deposits goes ahead.
Because growth has disappointed over the past few years, the government has struggled to get its public finances into shape. The budget office now estimates public debt will continue rising until 2016-17, peaking at 85.6 percent of Britain's annual gross domestic product. In its last forecast in December, it estimated debt would peak at 79.9 percent in 2015-16.Osborne did tinker a bit with the remit of the Bank of England â¿¿ giving it the chance to employ forward-looking guidance for interest rate expectations, similar to the approach now taken at the U.S. Federal Reserve. "But this is not as bold a change as many were probably hoping for," said Vicky Redwood, chief U.K. economist at Capital Economics. The central bank will have a new governor in the summer when current Bank of Canada chief Mark Carney takes the helm. Many expect further changes to the Bank of England's remit then. Osborne said that some government departments will be ordered to free up money and that 3 billion pounds would be diverted to infrastructure projects. The Conservatives' coalition partners, the Liberal Democrats, have been pushing for more projects funded by borrowing in the hope of supporting economic growth.