Britain set for rocky economic ride in 2011

2nd January 2011, Comments 0 comments

An austere tax increase, huge cuts in state spending and rising unemployment are all set to be unleashed on Britain in 2011, risking widespread strike action by disgruntled workers.

The Conservative-Liberal coalition led by Prime Minister David Cameron insists on the need to tighten government spending to quickly slash the country's record public deficit inherited from the previous administration.

"The national interest dictates that we do the right thing, which is to act, not the easy thing, which would be to delay," Cameron said in his New Year's message.

"In doing so, we should be clear: Britain has a really bright future to look forward to."

But the opposition Labour party says the government is putting at risk the country's fragile recovery from recession by rushing to reduce a deficit of around 150 billion pounds (174 billion euros, 231 billion dollars).

Union leaders are warning the cuts will spark massive strikes in the coming months.

"We can expect to see workers in both public and private sectors out on the picket lines fighting for jobs and against savage attacks on pensions and standards of living," warned Bob Crow, the militant head of the RMT transport union.

Britain's austerity drive in 2011 kicks off in earnest on Tuesday, when its rate of VAT, or sales tax on goods and services, jumps to 20 percent from 17.5 percent.

Ahead of the increase, shoppers have been busy in the post-Christmas sales period snapping up big-ticket items such as televisions.

Department store John Lewis, a key indicator of the country's retail sector strength, said it had enjoyed record takings last week.

"Consumers in general face serious headwinds and uncertainties so will see the sales as a time to make purchases that they could increasingly struggle to make in 2011," said Howard Archer, chief European economist at IHS Global Insight research group.

"The fact that VAT will rise... increases the attractiveness of the sales, particularly for big-ticket items."

The government, which was formed in May after an inconclusive general election, expects 330,000 jobs to be shed in Britain's public sector over the next four years under a cost-cutting drive totalling 81 billion pounds.

It comes against a background of weaker-than-expected economic growth, with British gross domestic product (GDP) climbing by only 0.7 percent in the third quarter, recent official data showed.

Meanwhile the number of unemployed in Britain has hit 2.5 million and is expected to rise further in 2011.

Elsewhere, the Bank of England is this year expected to begin raising its key interest rate from a record-low level of 0.50 percent to combat higher inflation.

The CBI, Britain's main business body and which backs the government's belt-tightening, acknowledged that the country's economy faces a tough 2011 due to the spending cuts, VAT hike and worries about eurozone debt.

"However, the latest CBI forecasts, which are pretty much in line with the consensus view, suggest that growth in private sector investment and trade will start to pick up in the second half of the year, and continue into 2012," said CBI head Richard Lambert.

"That would bring GDP growth of 2 percent in 2011 and 2.4 percent the year after -- not much to shout about, perhaps, at this stage of a recovery, but enough to keep unemployment under control and the public finances on track."

© 2011 AFP

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