UK slashes forecasts ahead of Carney’s arrival

Britain’s Treasury chief George Osborne says the recovery of the U.K. economy is taking longer than he had hoped, and warns of more spending cuts to come to get the country’s public finances under control.

“It’s taken time, but the British economy is healing,” Osborne told the House of Commons, though the latest official estimate forecasts a 0.2% shrinkage in the economy this year.

To aid with further healing, the Treasury has “opened the door to a more aggressive monetary policy” as they prepare to usher in Mark Carney as their next BoE governor, reports the Financial Times.

It also says Carney suggested setting targets for the overall size of the economy rather than inflation in a recent speech. Read more on how Carney will be welcomed in the UK.

Read: Carney courted for his renown, expertise

However, not all are sure he’s ready to take on the challenge of tackling the UK’s problems. Though he’s hailed as a talented financial superstar, some economists are worried he’s setting himself up for a fall.

One FT columnist said he finds more comfort in the “caution and detail” of BoE chief economist Spencer Dale’s future predictions than in Carney’s bold statements. Read more.

Read: Will Carney live up to his reputation?

Osborne himself says the paltry recovery in the U.K.—and a possible recession in the 17 countries that use the Euro—will mean Britain’s economy would only grow by 1.2% next year, down from the 2% it predicted in March.

“It’s not the rest of the world’s fault, it is your policies which have failed,” said Ed Balls, speaking for the opposition Labour Party.

He also confirms his target for public sector debt to start dropping as a percentage of GDP by 2015-2016 has also been pushed back a year.

“Today was the day (Osborne) started to acknowledge that this is a long-tail recovery rather than a trampoline bounce back to good times,” says Scott Corfe, senior economist at the Center for Economic and Business Research.

As a result of the revised forecasts, government spending will be cut a further 1% next year and 2% the year after. As well as spending cuts, Osborne also announced a cut in tax relief on the pensions of higher-rate taxpayers and a cap on welfare payments.

The taxation and spending measures announced Wednesday were forecast to yield an additional 3.9 billion pounds ($6.3 billion) to government income this year. Some 3.5 billion pounds of that sum is expected from a one-time auction of 4G mobile telecoms licenses.

Osborne announced the government would also crack down on tax avoidance, cut corporation tax to from the current 22% to 21% in 2014-15, increase infrastructure investment by 17% and raise tax deductions for capital investment by businesses 10-fold.

Households were promised an increase in the personal exemption from income tax and, for the elderly, a 2.5% boost in the basic state pension.

The Treasury also estimates that it will be able to recoup up to 5 billion pounds in lost tax by 2015-16 thanks to a new agreement with Swiss banking authorities.

Osborne also announced several capital investment projects including tax incentives to promote the production of shale gas. At the same time, the Department of Energy and Climate Change announced plans to build more gas-fired generating plants to replace aging coal, nuclear and gas plants.

A 1 billion pound loan was also announced to extend the London tube network.

“While the U.K.’s safe-haven status still looks secure, today’s statement does nothing to alter the poor fiscal and economic outlook,” says Vicky Redwood, chief U.K. economist at Capital Economics.