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Package of measures to boost economy as chancellor is forced to concede UK is on brink of another recession
George Osborne is to cap rail-fare rises for commuters and cut the cost of borrowing for small businesses in his autumn statement this week in a bid to ease the pain of the economic downturn, as he is forced to concede that Britain is on the brink of recession.
The chancellor will present a bleak picture in his twice-yearly update of the health of the economy in the House of Commons on Tuesday, with the independent Office of Budget Responsibility expected to predict growth of well below 1% in 2012, raising the prospect of a double-dip recession.
He will insist that sticking to his deficit targets is essential to protect the UK from turmoil on European bond markets.
But Labour will accuse him of choking off the recovery. Rachel Reeves, shadow chief secretary of the Treasury, said: "This doesn't feel like a safe haven to families and businesses and young people. This time last year the government were blaming the snow, then in the spring it was the extra bank holiday for the royal wedding, now it's the eurozone. At some point the government's going to have to take responsibility for its own actions."
Ministers have been searching for ways to kickstart growth and offer some relief to households hit hard by the spiralling cost of living. Transport secretary Justine Greening has won an agreement from the Treasury to cap the increase in regulated rail fares, due to be implemented in 2012, at 1% above inflation, instead of the 3% planned rise — though that will still mean prices go up by more than 6%. This temporary measure will cost £300m, and covers season tickets and peak travel on key commuter routes.
The chancellor is also expected to postpone the planned 3p increase in fuel duty for January, which has been the subject of a petition on the Downing Street website, paying for the measure by closing tax loopholes for the wealthy.
Free childcare places for toddlers and two-year-olds, currently restricted to the poorest 20% of households, will be expanded to more families, in a bid to improve life chances for disadvantaged children.
As well as offering populist measures for hard-pressed households, Osborne will take action to offset the growing squeeze on businesses. As part of a radical package of measures dubbed "credit easing", the government will offer to underwrite borrowing by the banks, helping to bring down their funding costs, which have been driven up by uncertainty about the euro crisis. The banks will then be instructed to use the funds raised to offer cheaper loans to small and medium-sized businesses.
The scheme is similar to measures introduced in the credit crisis to prevent the banking sector from seizing up. The Treasury hopes it will cut the interest rate on business loans by one percentage point – worth £5,000 on a £5m loan.
There will also be measures to encourage private sector investment into corporate bonds, and channel pension fund money into infrastructure projects.
A Treasury source said the package "should be a game-changer for credit for small companies by cutting the cost of finance and over time opening up new options for how it is raised."