Economy to contract this year despite Treasury's claim of growth

The British economy is set to contract this year, according to figures published by the Treasury which suggest that official growth forecasts will be downgraded sharply.

Tomorrow the independent Office for Budget Responsibility(OBR) will issue its latest bulletin on the state of the economy on the day that George Osborne presents his autumn statement. The OBR looks certain to lower its prediction in March that the economy would grow by 0.8 per cent this year and 2 per cent next year.

The Treasury’s latest projections, based on an average of those by 25 independent analysts and published on its website, show that the gross domestic product will shrink by 0.1 per cent this year and then achieve a modest 1.2 per cent growth next year. If repeated by the OBR, the figures would call into question David Cameron’s statement in October that the economic “good news is going to keep coming.”

Rachel Reeves, the shadow Chief Treasury Secretary, said: “These figures show just how much the Government’s economic policies are failing. Two years ago the Chancellor said his plan would lead to 2.8 per cent growth this year and 2.9 per cent next year. But by choking off the recovery and pushing Britain into a double-dip recession, Britain has been left worse off. This slow growth is leading to rising borrowing and risks causing long-term damage to our economy as other countries race ahead.”

Ms Reeves urged Mr Osborne to recognise that his policies are not working and to “take urgent action to kick-start our flatlining economy.”

The Chancellor will use his statement to announce that reforms to the private finance initiative (PFI) introduced by the previous Labour Government will save taxpayers up to £2.5bn. After criticism of the “spend now, pay later” schemes, Mr Osborne ordered a fundamental review. His new “PF2” programme will see the Government take a minority “taxpayer share” in the project company, have a seat on the board and share any financial benefits.

The system will be faster and cheaper, with an 18-month time limit for competitions for contracts, after some PFI projects took more than 60 months to be approved. New transparency rules will force private firms to publish the profits they make from such joint projects with the public sector.

Mr Osborne will announce that a drive by the Treasury and local authorities to save money on 100 existing contracts in government buildings and schools has already achieved £1.5bn, with a further £1bn in the pipeline.

The savings include £615m from better use of assets, such as wider use of energy efficient lightbulbs and higher occupation of buildings through “hotdesking;” £630m from bringing services in-house rather than hiring management consultants and £140m from reducing the frequency of services such as window cleaning.

Jesse Norman, a Conservative MP who campaigned for a new “PF2”, said last night: “I am delighted that the Treasury expects to make £2.5bn of savings. This is significantly more than we had expected. The PFI has become notorious for its cost, inflexibility and lack of transparency. It is very good news that the Government's new PF2 is addressing all of these issues.”

Mr Osborne is expected to unveil further cuts to the welfare budget, which have been backed by the Liberal Democrats in return for higher taxes on the rich, probably through reducing the £50,000 maximum annual payment to a pension fund that attracts tax relief. Some state benefits, such as jobseeker’s allowance, may rise by less than inflation next April, on the grounds that they increased by 5.2 per cent this year.