Britain raises taxes, cuts spending in emergency budget

23rd June 2010, Comments 0 comments

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

Finance minister George Osborne announced Tuesday 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.

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

"This emergency budget deals decisively with our country's record debts. It pays for the past and it plans for the future," said the chancellor, a member of the Conservative-Liberal Democrat coalition.

"Yes, it is tough, but it is also fair," the Conservative minister told parliament.

Many commentators were shocked by the extent of the cuts, however, with the Financial Times labelling the budget "a bloodbath" and warning it was a huge gamble that could bring down the new government if it failed.

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.

However, international ratings agency Fitch said on Tuesday that Britain's austerity budget should "materially strengthen confidence" in the country's public finances and its credit status.

The chancellor blamed the dire state of the public finances on the previous Labour government, which left him nursing a downwardly-revised record deficit of 154.7 billion pounds in the 2009-2010 financial year.

Osborne said that the deficit, or public sector net borrowing, will drop to 37 billion pounds by 2014-2015 and to 20 billion pounds by 2015-2016.

"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."

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. Public sector workers earning more than 21,000 pounds will have their pay frozen for two years.

A total 77 percent of the deficit reduction measures will stem from lower spending, with the remainder coming from higher taxes.

On an upbeat note, the point at which workers have to pay income tax will be raised by 1,000 pounds to 7,475 pounds, lifting 880,000 people out of the income tax net.

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, be subjected to a levy that is to raise two billion pounds a year. France and Germany announced similar moves on Tuesday.

Britain's 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.

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.

The Financial Times meanwhile warned of tough times ahead for the new government in persuading the public to swallow the bitter pill of the cuts and tax rises.

"This gamble has defined the government. If it is seen to have failed, it will be finished," said the paper.

© 2010 AFP

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