By George Parker and Chris Giles

Britain faces another five years of austerity after George Osborne mapped out a bleak course of stalling growth, public sector pay restraint, painful cuts and rising borrowing stretching into the next parliament.

Admitting that even this dark outlook could be optimistic if the eurozone crisis deepened, the chancellor warned that political failure in Europe could result in ?a much worse outcome? for Britain.

Mr Osborne, who portrayed himself as a resolute commander as Britain sailed into ?a debt storm?, confirmed that the economy was expected to grow by less than 1 per cent this year and next and that he had no chance of eliminating the current structural deficit – as hoped – before the 2015 election.

Among his ?tough choices?, the chancellor took ?1bn a year out of planned child tax credit increases and about ?280m from working tax credits – both paid to ?squeezed middle? households – as well as more than ?1bn over three years from overseas aid.

But these measures paled in comparison with ?15bn a year spending cuts he pencilled in after the next general election, just to meet his borrowing targets. According to Treasury figures, the total austerity package now stands at ?147bn a year by 2016-17, up from ?126bn in the March Budget with the grind of cuts intensifying after 2015.

The independent Office for Budget Responsibility said Mr Osborne?s new austerity measures meant he would still meet his fiscal mandate, but that he would only succeed in eliminating the structural deficit in 2016-17, two years later than predicted in his spring Budget.

The chancellor insisted his package was fiscally neutral before 2015 and was a sign that he could stick to his Plan A for deficit reduction while still releasing money from cuts and savings to fund growth initiatives. These included a youth jobs fund, infrastructure investment and a housing package.

?We will do whatever it takes to protect Britain from this debt storm, while doing all we can to build the foundations for future growth,? he told a sombre House of Commons. Contingency plans for an economic meltdown in the eurozone were being intensified, he said.

The OBR forecasts compounded the gloom, as it more than halved growth forecasts to just 0.9 per cent for this year, 0.7 per cent for 2012, before predicting a recovery to 2.1 per cent in 2013 and 2.7 per cent in the final year before the general election.

The forecasters blamed eurozone uncertainty and high commodity inflation for the growth shortfall, but also confirmed that the financial crash had inflicted permanent damage on the economy and had left a borrowing ?black hole?.

Ed Balls, shadow chancellor, said the collapse in growth was evidence that Mr Osborne?s austerity plan had failed and that it had contributed to a ??158bn borrowing bombshell?, the cumulative extra borrowing he will clock up by 2016 compared with last November?s forecasts.

Mr Osborne included some modest pieces of good news, including a delay in introducing January?s 3p fuel duty increase, help towards nursery education and a credit easing scheme to help small businesses.

Further pay curbs inflame union anger

George Osborne inflamed public sector anger by announcing further pay curbs on the eve of today?s strike by up to 2m government employees over pension reforms, writes Brian Groom.

The chancellor said average public sector pay rises would be capped at 1 per cent for each of the two years after the current two-year wage freeze ends next spring.

Mr Osborne also asked the independent review bodies that recommend public sector wage increases to consider how pay can be made ?more responsive? to local labour markets, which could lead to wage differentials.

Ministers argue that uniform pay rates are too high for some areas, crowding out the private sector, and too low in others, leaving unfilled vacancies for teachers and nurses.

Unions said the moves would stiffen strikers? resolve. Brendan Barber, leader of the Trades Union Congress, said the government had ?alienated its entire workforce?, while others called it a ?stealth attack on the north?.

Mr Osborne further upset unions by raising the state pension age to 67, effective in 2026. According to the Office for Budget Responsibility, 710,000 public sector jobs will be cut by 2016-17, up from its previous estimate of 400,000 by 2015-16.

Review bodies are asked to report by July, which could lead to local salary differentials from 2013. Some northern business leaders fear a sudden drop in public sector pay would hit the private sector by reducing local spending power.

According to Treasury aides, the public sector pay premium over the private sector ranges from 2 per cent to 15 per cent, depending on region.

? The Financial Times Limited 2011