British Chancellor of the Exchequer George Osborne on Tuesday imposed austerity measures on every family in Britain as he announced a £40 billion (US$59.6 billion) package of emergency tax increases, welfare cuts and government spending restraint designed to slash the UK budget deficit by the end of the parliament.
The chancellor said the “unavoidable budget” required a value added tax (VAT), or sales tax, rise from 17.5 percent to 20 percent in January next year, higher capital gains tax, a levy on banks, a two-year public sector pay freeze and less generous benefits, but insisted the package was needed to prevent the financial markets from turning on Britain.
In his debut budget speech, Osborne pleased the ratings agencies and the Organisation for Economic Co-operation and Development (OECD) by intensifying the £73 billion squeeze already planned by the last Labour government.
However, he signaled a second dose of gloom in October, when a three-year comprehensive spending review will spell out the size of the cuts for individual government departments.
Osborne warned yesterday that ring-fencing the state-funded National Health Service and international development meant non-protected departments would face average real cuts of 25 percent but that some clemency would be shown to education and defense.
The chancellor avoided even deeper cuts in the civil service by earmarking the welfare budget for more than a third — £11 billion — of the £32 billion reduction in spending.
Child benefits will be frozen and the government will eventually save almost £6 billion a year by linking all state benefits other than pensions to the slower-growing consumer prices index rather than the retail prices index. The UK Treasury will raise more than £12 billion from the increase in VAT, but the chancellor sought to soften the blow from the toughest budget in modern times by raising personal allowances by £1,000, linking pensions to earnings and raising child credits for the next two years.
He said a four-year phased cut in corporation tax would help the private sector become the engine of growth and the economy would have to rely more heavily on investment and exports over the coming years.
Seeking to pin the blame for the tough measures on the previous prime minister, Labour’s Gordon Brown, the chancellor said: “Today we have paid the debts of a failed past. And laid the foundations for a more prosperous future. The richest paying the most and the vulnerable protected. That is our approach. Prosperity for all. That is our goal.”
Vince Cable, the Liberal Democrat business secretary of state, agreed with the description of the budget as “tough but fair.”
Writing in yesterday’s Guardian, Cable said the budget would be vilified by those who sought to undermine the coalition government or did not understand the depths of the crisis. “But it is necessary and right.”
Osborne rejected criticism from the opposition Labour party that the budget threatened to derail the recovery, saying that the independent UK Office for Budget Responsibility had only marginally reduced its forecasts for growth this year and next as a result of yesterday’s spending cuts and tax increases.
The need to placate the markets after the sovereign debt crisis in the eurozone last month meant the pace of deficit reduction had to be accelerated, the chancellor added.
Net borrowing — a combination of the running costs of government and spending on infrastructure projects — will fall from 10.1 percent of national output to 1.1 percent within five years.
The budget measures are designed to turn a structural deficit in current spending of 4.8 percent of GDP into a surplus of 0.3 percent in four years, holding out the prospect of pre-election tax cuts if the economy performs as the chancellor expects.
Last night, the ratings agency Fitch said the budget would “materially strengthen confidence” in the country’s public finances, while the OECD praised Osborne for his “courage.”
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