Osborne's plan to spend his way out of trouble

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 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.

Due to his determination not to add to the deficit, the Chancellor 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 they are creating jobs only by cutting the income of the poorest. Two-thirds of the cash – some £20bn – is due to be raised from private pension funds investing in the building projects. Mr Osborne announced yesterday 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 some extra 40,000 places, mainly for primary-age youngsters, over the next three years.

The cash will be targeted on major cities facing demographic pressures. Other plans will be announced to build roads, bridges, public transport and telecommunications links and power stations, as well as to roll out broadband across the country. Mr Osborne hopes the schemes will generate contracts for industry, safeguarding and creating hundreds of thousands of jobs.

He will attempt to increase the amount of credit flowing in the economy by underwriting up to £40bn in loans to small and medium-sized companies. The move will enable the banks to borrow more cheaply, passing on the savings to firms in the form of lower interest rates.

The Chancellor said yesterday that up to £20bn would initially be available under the new National Loan Guarantee Scheme, which could increase to £40bn.

Other moves to be announced by Mr Osborne tomorrow include:

l An increase in the levy on bank balance sheets after the Treasury found the current 0.075 per cent rate was not enough to raise the £2.5bn it intended. It could rise to close to 0.1 per cent.

l Subsidies of around £250m to help energy-intensive industries, such as steel production, meet targets for cutting carbon emissions.

l A cap of around 6 per cent on rail-fare rises, as disclosed last week by The Independent, instead of the original planned increase of 8 per cent.

The reasons for the flurry of moves to support the economy will be underlined over the next 48 hours by 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.

It is thought to blame the downturn on the crisis on the eurozone rather than on the Government's economic strategy.

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.

Meanwhile Chris Grayling, the Employment minister, will today set out plans to cut the number of health safety regulations from 200 to 100.

He will condemn the rules as smothering business in red tape and scrap companies' automatic liability if an employee is injured at work.

But Brendan Barber, the TUC's general secretary, said: "Letting safety standards slip will not get a single unemployed young person back to work or help a small business find a new export market.

"What is holding back the economy is not proper protection for people at work, but a deep-seated economic crisis that government policies are making worse."