More cuts on way as Osborne plans £30bn boost to stave off recession

A major building programme to help breathe life into Britain's struggling economy will be announced by George Osborne tomorrow – but the cost of constructing the new schools, roads and power stations will be partly met by further spending cuts.

Plans for a £30bn infrastructure programme will be a key element in the Chancellor's Autumn Statement as he seeks ways of staving off recession. It also emerged yesterday that the Government would underwrite loans of up to £40bn to small businesses trying to keep afloat and that it would increase the levy on the banks' balance sheets.

The moves come as Mr Osborne faces the gloomiest of economic backdrops, with Britain looking likely to slide back into a downturn early next year. The Chancellor, pictured, will have to make extra spending cuts to help raise £5bn of the proposed infrastructure investment. Some of the cash is expected to be saved by a below-inflation increase in the value of working tax credits, while the rest could be found by trimming the welfare bill.

Such moves would provoke anger, with ministers facing accusations that they are creating jobs only by cutting the income of the poorest. Two-thirds of the cash – £20bn – is due to be raised from private pension funds investing in the building projects. Mr Osborne announced yesterday that a deal had been struck with the UK pensions industry to press ahead with the moves.

Among the first projects to get the go-ahead tomorrow will be a £600m programme of school building to create 40,000 extra places, mainly for primary-age youngsters. The cash will be targeted on major cities, including London and Birmingham. Other plans will be announced to build roads, bridges, public transport schemes, telecommunications links and power stations, as well as the roll-out of broadband across the country.

The flurry of moves to support the economycome alongside a succession of grim economic announcements. The Organisation for Economic Development and Co-operation is today expected to forecast a return to recession for the British economy in the first six months of next year.

Tomorrow – coinciding with Mr Osborne's statement – the independent Office for Budget Responsibility will cut its prediction for Britain's economic growth in 2011 to around 1 per cent, down from the 1.7 per cent it forecast in March and 2.6 per cent in June 2010.

The British Chambers of Commerce last night slashed its forecast for growth in 2012 to just 0.8 per cent from 2.1 per cent previously, and warned that any recovery would be "very weak" for the next two or three quarters.