Osborne to Hit Banks, Welfare, Pensions to Close Record U.K. Budget Gap
U.K. Chancellor of the Exchequer George Osborne will force banks and savers to pay more tax in his first budget, which will map out an austerity plan aimed at closing Britain’s record budget gap within five years.
Osborne said the “pain” of the biggest spending squeeze in 30 years will be spread over the lifetime of the current administration and that his plans “will put beyond doubt” the government’s resolve in filling the budget hole. He also vowed to spread the pain evenly throughout all parts of society.
“The package that I announce on Tuesday will be staggered over the parliament,” Osborne told BBC1 television’s Sunday AM program in London. “It doesn’t come into effect in one day or one month.”
His five-year austerity plan will set the overall size of the budget while leaving details on where the spending reductions will come until the autumn, when he maps out departmental spending plans. Osborne today said it remains a “good rule of thumb” that cuts account for 80 percent of the consolidation and that tax increases make up 20 percent.
The Institute for Fiscal Studies estimates that Osborne will need to squeeze the budget by 85 billion pounds ($126 billion), equivalent to 5.7 percent of gross domestic product, if he wants to achieve his aim of closing the shortfall by 2015.
‘Very Serious Risk’
Osborne said the sovereign-debt crisis affecting European countries had increased the need for Britain to address its deficit that was equivalent to 11 percent of GDP last year.
Some economists and opposition parties say existing government forecasts of 2.6 percent growth in 2011 and 2.8 percent in 2012 may be trimmed in this week’s budget as Osborne’s measures suck resources out of the economy.
“There is undeniably a very serious risk that accelerated and intensified fiscal tightening could derail a still fragile U.K. economic recovery,” Howard Archer, chief European economist at IHS Global Insight, said today. Ed Balls, the former schools secretary under Gordon Brown’s premiership, told the BBC that Osborne risks repeating “the mistakes of the 1930s.”
Part of the effort to sell the austerity measures to voters will include a levy on banks’ assets or liabilities that will raise at least 2 billion pounds a year, according to three people with knowledge of the plans. Osborne today suggested he will make the announcement this week.
Voter Opinions
A poll by ComRes Ltd. published in today’s Independent on Sunday suggests voters accept the need for fiscal retrenchment. More than half said child benefits should be withdrawn from the wealthiest families, while 48 percent said they would rather pay more taxes than have public spending cut.
ComRes telephoned 1,004 adults on June 16-17. No margin of error was given.
Osborne told the BBC that he’ll press ahead with plans to increase capital-gains tax to prevent rich people from declaring earned income, which is subject to as much as 50 percent tax, as a capital gain that is liable to an 18 percent tax.
“We will have more to say about that,” Osborne said. He was more elusive over whether he will raise value-added tax after the Sunday Telegraph reported that it may rise to 20 percent from 17.5 percent.
Osborne took aim at Britain’s 187 billion-pound welfare budget, which accounts for almost a third of spending. He pledged to reform the system because it discourages people from taking low-paid jobs in favor of state handouts.
‘Out of Control’
“It has got out of control in recent years,” he said.
The effort to trim the deficit will also focus on the public-sector workforce, Osborne said. He told the BBC that many of Britain’s 6.1 million employees must accept a wage freeze that extends beyond this year in order to keep their jobs.
The last Labour government added 900,000 workers to the state payroll during its 13 years in power, more than a third of them in the past two years to help counter the recession. The government now accounts for one in five jobs in Britain.
Part of the effort to rebalance the workforce will include a one-year payroll-tax break costing 900 million pounds to encourage economic growth outside the most prosperous regions, according to a person with knowledge of the plans.
Osborne also said he has appointed former Labour Party Cabinet Minister John Hutton to chair an independent panel on public-sector pensions that will report by September on how to make savings over the next few years.
To contact the reporter on this story: Gonzalo Vina in London at gvina@bloomberg.net
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