Millions of families will feel the pinch for two more years as Britain struggles to recover from economic crisis
Office for Budget Responsibility said there would be no respite until 2014Chancellor accepted he will miss key debt-cutting target – putting UK's AAA credit rating at risk but Danny Alexander said it wasn't the 'be all and end all'
00:13 GMT, 6 December 2012
Families were yesterday warned the squeeze on household incomes will continue for two more years as Britain struggles to recover from the economic crisis.
The Office for Budget Responsibility said there would be no respite until 2014.
The Treasury watchdog also revealed that the economy shrank by 6.3 per cent in the banking crash of 2008 and 2009 – the biggest slump since the Second World War.
Tough times: Families were warned the squeeze on household incomes will continue for two more years as Britain struggles to recover from the economic crisis
It came as George Osborne admitted the recovery will take longer than expected after a sharp downgrade in growth forecasts for the next five years.
The Chancellor also accepted that he will miss a key debt-cutting target – putting Britain’s coveted AAA credit rating at risk.
But Danny Alexander, chief secretary to the Treasury, said the credit rating ‘was not the be all and end all’, arguing that maintaining the confidence of the financial markets was more important.
Leading ratings agency Fitch last night said the UK’s failure to hit its debt target ‘weakens the credibility’ of its AAA rating.
A downgrade would be humiliating for the Chancellor and could drive up borrowing costs for the Government, businesses and households.
The national debt is set to rise from 1.2trillion this year to more than 1.5trillion in 2018 – or 60,000 per household.
Labour shadow chancellor Ed balls said the Government’s economic plan was in ‘tatters’ as austerity was pushed out to 2018.
But Mr Osborne said: ‘Britain is on the right track and turning back now would be a disaster.’
The report by the OBR underlined the pain facing millions of households in the UK as a cocktail of high inflation and muted wage growth eat into family budgets.
George Osborne, left, accepted that he will miss a key debt-cutting target – putting Britain's coveted AAA credit rating at risk, but Danny Alexander, chief secretary to the Treasury, right, said the credit rating 'was not the be all and end all'
It was hoped that 2013 would finally see average pay rise faster than prices after years of misery for workers.
But the OBR said instead of average earnings rising by 3.1 per cent and prices by 1.9 per cent, as it thought in March, wages would only go up 2.2 per cent while inflation hits 2.5 per cent.
It said there would be some respite in 2014 when inflation falls to 2.2 per cent and average wages increase 2.8 per cent.
OBR chairman Robert Chote said the reduced spending power of shoppers will hit growth in the coming years. But he laid most of the blame for the stuttering recovery on the global economy and the crisis-torn eurozone.
The OBR said it expects the economy to shrink by 0.1 per cent this year and grow by just 1.2 per cent in 2013 having previously pencilled in two years of growth of 0.8 per cent and 2 per cent.
Mr Osborne admitted weaker-than-expected growth meant he would be a year late in cutting the national debt as a proportion of national income.
He had planned to reduce the debt burden by 2015-16 – the year of the general election.
The Chancellor, however, was able to take heart from the news that annual borrowing is expected to fall each year – thanks in part to a string of one-off accounting bonuses.
Having peaked at 159billion under Labour, it fell to 121billion last year and is set to fall to 49billion in 2016-17.