George Osborne has admitted that tackling Britain's debt mountain will take longer than hoped, but warned that changing course would be a "complete disaster".
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The Chancellor's admission, combined with lower growth forecasts expected from the Government's official forecaster next week, means Mr Osborne could be forced to borrow up to £81bn more in the years ahead, and raises the prospect of a further fiscal squeeze.
Speaking on the Andrew Marr Show , Mr Osborne said: "It's clearly taking longer to deal with Britain's debt, it's clearly taking longer to recover from the financial crisis than anyone would have hoped, but we've made real progress [...] to go back to the borrowing and the debt and the spending [that Shadow Chancellor] Ed Balls represents would be a complete disaster."
Mr Osborne said that the ongoing eurozone crisis, higher oil prices and problems in emerging markets had hampered Britain's recovery. "We don't operate in a vacuum," he said.
But Mr Balls, also speaking to Andrew Marr, said that the Government's economic plan had failed.
"If you're in a hole you should stop digging. He's still digging, and making it much worse for families," he said.
"Where are the decisions on aviation? Where's HS2? Why aren't we building any more roads? Where is the energy policy? The growth plan is a shambles."
The Chancellor insisted that going back on the Government's commitment to deal with it debt "would [...] put us into the place in which some European countries are at the moment, and that is not a place Britain wants to be."
"Germany has done better, but not because they haven't been tough on their deficit. It's just they spent the last decade actually selling themselves to economies like China and India, making sure that they're economy was balanced, and not overly dependent on finance.
"They did lots of things like investing on education that we should have done. Now i'm clearing up that mess. It can't be done overnight."
Mr Osborne also promised to remain tough on welfare. "We've already made £18bn in savings in the welfare bill. We're determined to reform welfare, not just to cut bills, but so that work always pays, so its always better off for someone to work that extra hour, to go out and and get the job. Fundamentally that is about creating not just a fairer society, but a more competitive society.
"Britain cannot compete in the compete in the global race if it is shackled with welfare bills that it simply cannot afford."
Earlier, Mr Osborne acknowledged that Britain's deficit reduction may take longer than he had planned but said that the action by the government had helped to calm a situation where Britain was "staring into the economic abyss".
Writing in the Sun on Sunday , he said: "The last thing we should do now is change course."
The Government's official forecaster is expected to warn this week that the Chancellor will miss his target for bringing down Britain's debt mountain, raising the prospect of more measures on austerity.
The Office for Budget Responsibility (OBR) will tell Mr Osborne that the Government's efforts to reduce borrowing are in danger when it updates its forecasts for the public finances alongside the Chancellor's Autumn Statement on Wednesday.
Writing in the Sunday Telegraph , Sir Alan Budd, who was chairman of the interim OBR , said:
"It looks as if he will have to announce that he will fail to achieve one of his targets and will have to introduce painful measures to achieve the other one," he said.
The warning is due as the watchdog downgrades its growth projections for the UK, in line with many other forecasters, in light of a faltering global economy.
The OBR's March estimate of 0.8pc growth for this year looks set to be brought down to "mildly negative territory", said economists at Investec (EUREX: INVF.EX - news) . They also expect next year's forecast, currently for growth of 2pc, to be trimmed by around 0.5 percentage points.
Philip Shaw, Investec's chief economist, warned that reduced growth could lead to an £81bn black hole in Britain's public finances by 2015/16, meaning the government would need to borrow more to plug the revenue shortfall.