Osborne Says U.K. to Avoid Recession as He Keeps Austerity Push

Chancellor of the Exchequer George Osborne said Britain will avoid sliding back into recession as he delivered a budget intended to maintain his austerity drive.

Forecasts from the nonpartisan Office for Budget Responsibility show the economy expanding 0.8 percent this year, up from a November estimate of 0.7 percent, Osborne told Parliament in London today. Gross domestic product shrank 0.2 percent in the last three months of 2011.

Prime Minister David Cameron’s government is seeking to retain the U.K.’s AAA credit rating by erasing the bulk of the deficit by 2017 and taking measures to support growth that don’t require additional borrowing. The shortfall unexpectedly increased last month, data released today showed.

“Britain is going to earn its way in the world,” Osborne said. “There is no other road to recovery.”

With Fitch Ratings revising its U.K. outlook last week to “negative” from “stable,” Osborne is sticking to plans to ax a budget deficit now totaling more than 8 percent of gross domestic product, a shortfall greater than in France, Germany and Italy.

Osborne cited the euro debt crisis and rising oil prices as threats to growth. Unemployment will peak at 8.7 percent before falling to 6.3 percent in 2016, while the budget gap will drop to 7.6 percent of GDP in the fiscal year beginning next month, the budget office said.

Tax Cuts

Osborne may use the budget to cut the 50 percent tax rate on earnings above 150,000 pounds ($237,000) to 45 percent. That cost may be offset by a higher levy on property sales topping $2 million and measures to quell tax avoidance.

Handing a break to high earners would represent a political gambit as opposition Labour leaders attack the government’s priorities.

“It is completely the wrong priority to cut taxes for the richest people in Britain,” Labour leader Ed Miliband said in a statement before Osborne spoke.

The U.K.’s austerity drive distinguishes it from the U.S. focus on spurring expansion and has drawn criticism from Labour that Osborne is jeopardizing growth by cutting too fast. The chancellor responds that failure to retrench would jolt interest rates and cost the U.K. its top credit rating.

Fitch Ratings said last week that Britain has limited ability to deal with shocks and that there is a “slightly greater” than 50 percent chance that the AAA rating will be lowered within two years. Moody’s Investors Service said last month that Britain risks losing its top-level rating if the economy deteriorates.

Recovery

The economy is still struggling to recover, with the pain compounded by previous budget cuts that will see more than 700,000 public-sector jobs axed in the tightest fiscal squeeze since World War II. The London-based Institute for Fiscal Studies calculates that while about three-quarters of the envisaged tax increases have been implemented, only about a tenth of the spending cuts have.

The budget deficit unexpectedly increased in February as taxes fell and spending surged, the Office for National Statistics said in London today. Net borrowing excluding support for banks was 15.2 billion pounds, the highest for any February on record, compared with 8.9 billion pounds a year earlier. The median of 17 forecasts in a Bloomberg News survey was 8 billion pounds.

Jobless Claims

U.K. jobless claims rose more than economists forecast in February, and a broader measure of unemployment remained at the highest level in 16 years, according to data released March 14 by the ONS. Minutes released today showed that Bank of England policy makers split for a second month with two seeking more stimulus as the majority favored waiting to gauge “substantial risks” to the inflation outlook.

A ComRes Ltd. poll published yesterday found 64 percent of people saying they believed they’d be worse off after the budget, 61 percent that the government was out of touch with the economic needs of the public and 59 percent saying that the budget will look after the rich more than the poor. ComRes interviewed 2,057 adults online March 16-18.

To contact the reporters on this story: Simon Kennedy in London at skennedy4@bloomberg.net Gonzalo Vina in London at gvina@bloomberg.net

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

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