British budget promises growth despite downgrade

23rd March 2011, Comments 0 comments

Finance minister George Osborne unveiled plans to kick-start Britain's weak economy as he delivered his annual budget Wednesday but admitted that growth would be lower than expected this year.

Chancellor of the Exchequer Osborne unveiled a budget for "growth and jobs," even as the government's massive spending cuts and tax hikes risk pushing Britain back into recession according to some analysts.

Ignoring widespread calls to reduce the size of the coalition's spending cuts -- the deepest for decades -- Osborne told parliament: "Britain has a plan and we're sticking to it."

A total of £21 billion ($34 billion) of government spending cuts are due in 2011-12, around a quarter of the savings lined up by the Conservative-Liberal Democrat coalition by 2015.

Against this backdrop, Osborne on Wednesday lowered the government's official forecast for 2011 economic growth to 1.7 percent from an earlier prediction of 2.1 percent.

He said the major downgrade, which was in line with market expectations, came after the economy surprisingly shrank in the final quarter 2010 and due to rising commodity prices and inflation.

The 2012 growth estimate was also trimmed to 2.5 percent, compared with 2.6 percent previously. Further ahead, the economy is predicted to pick up speed, expanding by 2.9 percent in 2013.

Osborne also downgraded public sector net borrowing for the current fiscal year, which runs to the end of March, to £146 billion from £148.5 billion previously.

In a boost to the private sector, he cut corporation tax paid by businesses by two percent after earlier announcing that he planned a reduction of one percent.

And in a lift for the construction sector, he unveiled financial assistance for people struggling to buy their first home.

However in a blow to Britons ahead of the budget, Osborne in January hiked the rate of Britain's sales tax, or VAT, to 20 percent from 17.5.

And last month he announced that a special levy on banks -- imposed following the 2008 financial crisis -- would be raised to yield £2.5 billion this year.

Following last year's general election, Osborne gave a painful emergency budget and spending review in which he announced plans to save £81 billion over five years in order to slash a record public deficit.

The chancellor remains on course to undershoot his official borrowing target for the current 2010/2011 financial year that runs to the end of March.

This despite official data published Tuesday showing that public sector net borrowing surprisingly hit a much larger-than-expected £11.8 billion in February -- the highest level on record for the month.

"The government still faces a long, hard slog in ensuring that borrowing comes down to anything approaching sustainable levels and from an economic perspective," Investec economist Philip Shaw said ahead of the budget.

The coalition, which rose to office in May 2010, is seeking to slash a record public deficit run up under the previous Labour government due to bank bailouts and weak tax revenues in the recession.

In a further blow ahead of the budget, separate data published Tuesday showed that British annual inflation jumped to 4.4 percent in February, the highest level since October 2008.

© 2011 AFP

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