Britain launches emergency tax hikes, spending cuts

22nd June 2010, Comments 0 comments

Britain on Tuesday launched an emergency package of higher taxation and spending cuts that are aimed at slashing a huge public deficit, amid intense concern about sky-high debt levels in Europe.

Finance minister George Osborne announced that he would slap a levy on banks, ramp up taxation on goods and services, freeze public sector pay and slash benefits spending in an attempt to cut the public deficit.

The chancellor of the exchequer said he would seek fiscal consolidation totalling tens of billions of pounds.

But with Britain's recovery set to be weaker than expected, Osborne's Conservative-Liberal Democrat coalition delivered tax cuts that were aimed at helping the low paid and business world.

The chancellor blamed the dire state of the public finances on the previous Labour government, which left him nursing a record deficit of 156 billion pounds in the 2009-2010 financial year.

Osborne said that the deficit, or public sector net borrowing, will drop to 71 billion pounds by 2014-2015, according to forecasts from the newly-formed Office for Budget Responsibility.

"This is an emergency budget, so let me speak plainly about the emergency that we face," Osborne told parliament.

"The coalition government has inherited from its predecessor the largest budget deficit of any economy in Europe with the single exception of Ireland.

"One pound in every four we spend is being borrowed. What we have not inherited from our predecessor is a credible plan to reduce their record deficit."

Osborne also said the government would establish a "fiscal mandate" to eliminate the structural deficit -- the level of borrowing that can be cut only by tax hikes and spending cuts -- within the next five years.

"This emergency budget deals decisively with our country's record debts. It pays for the past and it plans for the future," he noted.

"Yes, it is tough, but it is also fair ... This is the unavoidable budget," he declared.

Value-added tax (VAT) on goods and services will be lifted to 20 percent from the current level of 17.5 percent in January 2011.

The lion's share -- 77 percent -- of the deficit reduction measures will stem from lower spending, with the remainder coming from higher taxes.

Britain will also lift the tax-free income threshold -- the level at which income tax becomes payable -- to 7,475 pounds, from the current level of 6,475 pounds, in April 2011.

The move, which will lift about 880,000 Britons out of the income tax net, is part of the coalition government's agreed aim of raising the threshold to 10,000 pounds over the long term.

And Osborne also announced that corporation taxation will be trimmed to 27 percent in 2011 and will be subsequently trimmed by one percentage point annually for the next three years, taking it down to a record-low of 24 percent.

As a result of the new budget measures, British economic growth forecasts were downgraded to 1.2 percent this year and 2.3 percent next year, compared with prior estimates for expansion of 1.3 percent and 2.6 percent.

Banks operating in Britain will meanwhile, from January next year, be subjected to a levy that is to raise two billion pounds a year. France and Germany said Tuesday that they would announce similar moves.

Osborne set out his emergency budget against the backdrop of soaring debt levels in the eurozone and concerns that Britain's top-rated AAA credit rating could be at risk.

"Fear about sustainability of sovereign debt is the greatest risk to the recovery of European economies," said Osborne.

The public deficit soared to a record level in 2009-2010, as a severe recession hit tax revenues and the erstwhile Labour government spent billions bailing out banks.

After British Prime Minister David Cameron's coalition took power last month, it announced plans to axe 6.2 billion pounds of spending in the year to March 2011.

In addition, it last week axed or suspended projects that were planned by the previous Labout government and would have cost 11.0 billion pounds.

Alistair Darling, Osborne's predecessor and now Labour party finance spokesman, argued on Tuesday that the new chancellor was risking the economic recovery with speedy spending cuts.

"The risk is (that) you derail the recovery and that means your borrowing in the longer term will be higher than it would otherwise be," he told BBC television.

And economist Douglas McWilliams, at the Centre for Economics and Business Research consultancy, forecast lower growth as a result of the budget.

"We see the tough decisions in the budget as putting the recovery more at risk," Williams said, adding that he predicted average growth of 1.5 percent over the next three years.

He added: "With our lower growth forecast we now think that base (interest) rates will be stable at 0.5 percent until the end of 2012."

© 2010 AFP

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