Osborne Lowers U.K. Growth Forecast, Increases Borrowing, Cuts Company Tax

Chancellor of the Exchequer George Osborne said the British economy will grow more slowly than forecast in 2011 and the U.K. will need to borrow more than previously thought in the next five years.

The Office for Budget Responsibility predicts 2011 growth of 1.7 percent, down from the 2.1 percent forecast in November, Osborne said in his budget speech in the House of Commons in London today. The government will borrow 122 billion pounds ($198 billion) next year compared with an earlier forecast of 117 billion pounds. The chancellor said he will stick to his plan to eliminate the bulk of the deficit by 2015.

Osborne announced tax reductions in what he said was a “fiscally neutral” budget, with a 2 percentage-point cut in company tax this year to 26 percent, an increase in the tax-free allowance for personal earnings and an immediate lowering of duty on gasoline. The levy on banks will rise in January.

“Britain has a plan and we’re sticking to it,” Osborne told lawmakers. “Today’s budget is about reforming the nation’s economy, so that we have enduring growth and jobs in the future,” he said.

Deficit Forecasts

The budget deficit in the fiscal year through March will be 145.9 billion pounds, 2.6 billion pounds lower than forecast in November, Osborne said. Even so, the budget office raised its forecast for borrowing in subsequent years. It now expects the deficit to total 368 billion pounds between 2011 and 2016 -- 46 billion pounds more than previously predicted.

As a result, the budget shortfall will drop from 9.9 percent of gross domestic product in the current fiscal year to 1.5 percent by April 2016 rather than the 1 percent forecast in November. The plans envisages 80 billion pounds of spending cuts by 2015.

The pound fell against the dollar after Osborne’s growth estimate. Sterling slid as much as 0.9 percent to $1.6219 and traded at $1.6259 as of 2:56 p.m. in London.

The budget is intended to rebalance the economy and help “hard-pressed families,” Osborne said, as accelerating inflation, rising unemployment and the threat of higher interest rates put pressure on voters.

The main opposition Labour Party has opened up a lead of as much as 11 percentage points over Prime Minister David Cameron’s Conservatives as the coalition government implements the biggest public-spending squeeze since World War II.

‘Key Question’

“As far as the public are concerned this is about as good as they have hoped for,” Andrew Hawkins, the chairman of polling company ComRes Ltd., said in an e-mailed statement. “The key question is whether the dire macroeconomic situation, with growth lower than previously thought and inflation higher, will come back to haunt George Osborne’s claim to be a prudent chancellor if growth does not return quickly.”

The OBR predicts the economy will expand 2.5 percent in 2012, 2.9 percent in 2013 and 2014, and 2.8 percent in 2015, Osborne said. It previously said the U.K. would grow 2.6 percent next year.

“The chancellor spoke for an hour but one fact said it all,” Labour leader Ed Miliband told lawmakers. “Growth down last year, this year and next year. It’s the same old Tories. It’s hurting but it isn’t working.”

Osborne outlined measures to encourage entrepreneurs and cut red tape by simplifying the tax system while offering incentives for investment.

‘Fuel Into the Tank’

“We are only going to raise the living standards of families if we have an economy that can compete in the modern age,” Osborne said. “We have put fuel into the tank of the British economy.”

Osborne said the government will cut the tax on gasoline by 1 penny per liter starting tonight and delay a planned inflation-linked increase. He raised the supplementary charge on North Sea oil production to 32 percent from 20 percent to pay for the cut.

The chancellor also pledged a crackdown on tax avoidance, which will raise an extra 1 billion pounds in the next year, saying that “tax avoidance and evasion means we have to ask more from working families and that is not fair.”

Company tax will be cut starting in April by more than the previously planned 1 percentage point, Osborne said. The tax will then fall by 1 point in each of the following three years, taking the rate to 23 percent.

Bank Levy

Osborne said the bank-levy rate next year will be adjusted to “offset” the effect of the cut in corporation tax. The levy will increase to 0.078 percent from January 2012, raising an additional 100 million pounds, according to the Treasury.

Seeking to turn around sentiment in the housing market, Osborne also announced 250 million pounds of interest-free loans for 10,000 people buying their first house or apartment.

The allowance for income tax will rise by 1,000 pounds, Osborne said, resulting in an extra 160 pounds a year in real terms for 23 million taxpayers.

Before Osborne spoke, the Bank of England released minutes of its March 10 decision to leave its benchmark interest rate at a record low of 0.5 percent. The Monetary Policy Committee voted 6-3 to keep rates on hold this month and saw “merit in waiting” to assess the impact of rising oil prices.

The economic “forecasts and the government’s fiscal plans continue to rest on a very healthy acceleration in GDP growth over the next few years,” Jonathan Loynes, the chief European economist at Capital Economics Ltd. in London, said in an e- mailed statement. “That, in turn, would seem to rely heavily on the MPC to keep monetary policy very supportive.”

To contact the reporters on this story: Thomas Penny in London at tpenny@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net

Chancellor of the Exchequer George Osborne holds the dispatch box containing the 2011 budget outside 11 Downing Street in London. Photographer: Rupert Hartley/Bloomberg