Gordon Brown, the Chancellor, finally recognised the sluggishness of the UK economy today and slashed the Treasury's optimistic growth forecasts to bring them into line with independent and international forecasters.

Blaming soaring oil and commodity prices, Mr Brown cut the growth forecast for this year to just 1.75 per cent, down from the 3 to 3.5 per cent forecast in the Budget.

Delivering his annual Pre-Budget Report in Parliament this afternoon, Mr Brown said that this had been a "tough year" but he insisted that Britain was managing to tackle both global and domestic price pressures to keep inflation in its target range.

He told MPs: "As Chancellor I have always understood that the strength of a monetary and fiscal regime is how it performs, not just in the good years but in this, the toughest and most challenging year for the economy.

"This year we have seen inflation not above 10 per cent but around 2 per cent; interest rates not rising above 10 per cent but peaking below 5 per cent; unemployment not as in the past at record highs, but at record lows; not the economy in recession, but growth even in this toughest year at 1.75 per cent."

Mr Brown added: "This is the 34th continued quarter of growth under a Labour government. We are the first government of any party to achieve eight years of uninterrupted growth since 1805."

The Chancellor also cut growth forecasts for next year, although he said that growth was likely to pick up somewhat, to between 2.0 and 2.5 per cent (down from the 3.0 to 3.5 per cent forecast in the Budget). He forecast growth of 2.75-3.25 per cent for 2007 and 2008, growth that would help him to balance the books in future years.

Until an appeal from the Speaker for calm, Mr Brown was forced almost to shout out his speech over loud heckling from the Conservative benches - especially when he pointed out that global oil and commodity prices had doubled over the past 12 months. The Opposition says that Labour is using the price of oil as an excuse for an under-performing economy.

Mr Brown said that the Government's stewardship of the economy, coupled with the actions of the Bank of England, had helped house prices to achieve a soft landing. Prices rises had moderated to just three per cent after three years of unsustainable 15-per cent rises.

He said: "Britain ends this year with inflation lower than America, lower than the Euro area, lower than the European Union. We are on course to meet our inflation target, not just this year but next year and the year after that."

On public finances, Mr Brown admitted that he would have to borrow £4 billion more this financial year, bringing net borrowing to £37 billion - although he said that his fiscal rules would still be met.

He announced £580m extra spending on the Iraq war and Army operations in Afghanistan and £135 million on anti-terrorism measures.

But he said that his fiscal 'golden rules' limiting Government spending over the economic cycle "will be met".

Mr Brown said that some extra money would be made by a doubling of the supplementary charge on oil companies from 10 per cent to 20 per cent of their profits.

Other measures announced by the Chancellor include a scheme to help young buyers onto the housing ladder by allowing partner banks and builders to take a stake in first-time mortgages. He also said that legislation on Real Estate Investment Trusts (REITS) would be introduced this month to increase the quality and availability of rental property via a tax-exempt investment vehicle.

Small businesses would be able to take advantage of more flexible VAT payments, Mr Brown said. And a new film tax credit would be worth 16 per cent to big budget productions and 20 per cent to smaller films.

The Chancellor announced some extra help for pensioners by extending winter fuel payments of £200 a year for the foreseeable future and freezing diesel and petrol duties at a cost of £600 million a year.

Replying to the report, George Osborne, the Shadow Chancellor, accused Mr Brown of rushing through the cuts in the growth forecast and higher net borrowing - which Mr Osborne put at £151 billion over the next five years.

"No wonder he looks so embarrassed," Mr Osborne said. "The longer he stays at the Treasury, the more his chickens are coming home to roost."

Dismissing Mr Brown as "a Chancellor who has passed his sell-by date, a Chancellor who is holding Britain back", Mr Osborne also challenged Mr Brown's assertion that the UK's economic growth was higher than that of its major partners and competitors, saying that 18 of 25 European Union countries enjoyed stronger growth rates.

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