Britain faces the prospect of the longest economic downturn in a century, with figures yesterday showing growth stagnant and the economy struggling to avoid a return to recession.
The Chancellor George Osborne is under pressure from his Cabinet colleagues to come up with a convincing plan to breathe new life into the faltering recovery.
Amid dismay among ministers over yesterday's anaemic economic growth figures, Mr Osborne is preparing fresh measures to try to ease the pressure on struggling small businesses. He hinted yesterday that planned cuts in corporation tax could be brought forward in an attempt to encourage businesses to expand. The figures showed that the UK's economy is flatlining, with growth slowing to just 0.2 per cent in the second quarter of 2011. It follows growth rates of -0.5 per cent and 0.5 per cent in the previous two quarters.
The Office for National Statistics said the figures had been hit by the extra bank holiday to mark the royal wedding, the unseasonably warm weather in April and the impact of Japan's tsunami and calculated that growth would have been 0.7 per cent without those one-off factors. Critics said the susceptibility of the economy to such events underlined the weakness of the tentative recovery. Although Mr Osborne appears to have avoided the nightmare of a double-dip recession, but will face the embarrassment in his Autumn Statement of being forced to cut his growth forecasts for the economy.
With Britain facing the prospect of the most protracted downturn for a century, he will use the occasion to try to inject fresh life into the economy. But his room for extra spending or tax cuts is extremely limited because of the squeeze on the public finances.
Senior Whitehall sources last night played down the prospect of dramatic cuts in business taxes in the autumn, apart from limited extra support for company start-ups. One possibility is that reductions already in the pipeline in corporation tax could be brought forward. The Chancellor said yesterday: "Business taxes have come down this year and we have further cuts in corporation tax coming down the path."
The sources indicated Mr Osborne was focusing on easing the regulatory burden on companies. The Treasury is also examining a scheme under which private firms would be subsidised to lay fibre-optic cabling in several major cities. Vince Cable, the Business Secretary, is privately pressing for moves to encourage the high-street banks to increase lending to small firms.
The Government had prepared the ground for lacklustre figures, repeatedly warning that Britain faces a very difficult year, and both David Cameron and Mr Osborne declared themselves pleased that the economy was still expanding.
The Chancellor said: "The positive news is that the British economy is continuing to grow and is creating jobs. And it is positive news too at a time of real international instability that we are a safe haven in the storm."
However, ministers will be hoping for much healthier figures in the second half of the year as proof the recovery – currently much more sluggish than in France, Germany and the United States – is gathering pace.
The Prime Minister and Mr Osborne were forced to dismiss reports of divisions between No 10 and No 11 Downing Street over economic strategy. Mr Cameron said: "Unlike previous governments, there is one team at the heart of this Government."
But Ed Balls, the shadow Chancellor, accused Mr Osborne of "recklessly choking off" the recovery by raising VAT and ordering deep spending cuts. Mr Balls said: "He ripped up the foundations of the house as the global economic hurricane was brewing, undermining our recovery well before the recent problems in the eurozone and America and leaving us dangerously exposed if things now go wrong there. Instead of clutching at excuses like too much snow in winter and too much sun in the spring, George Osborne needs to realise he only has himself to blame for the choices he made a year ago.