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U.K. Economy Grew 0.7% in Third Quarter, Matching Median Forecast
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Osborne Mutes Stimulus Calls as He Sticks With U.K. Austerity

Chancellor of the Exchequer George Osborne promised another austere budget and policies designed to mute calls for a fiscal stimulus for the U.K. economy.

Osborne said the pressures facing Cyprus are a reminder of what financial markets will do to nations that fail to act and suggested that he will resist calls in the March 20 annual budget to borrow money to fund giveaways. Instead, he promised measures to help the British retirees, military and diplomatic staff in Cyprus who are affected by the tax on bank deposits dictated by the island’s bailout, and he said he’d support plans to stimulate economic growth in Britain’s regions.

“There is no easy answer, there is no miracle cure,” Osborne, 41, told BBC1 Television in London yesterday. “We have to go on confronting the very difficult economic problems.”

Calls for greater action to aid growth from both his Conservative Party and the Liberal Democrats in the coalition government have subsided in recent days, suggesting Osborne’s budget will include measures to appease cabinet critics such as Business Secretary Vince Cable. Osborne will have to fund such actions with cuts elsewhere to stay the course on austerity.

The opposition Labour Party repeated its call for Osborne to cut value-added tax, reduce National Insurance (ANAT) contributions for small companies and reintroduce the 10 percent starting rate of income tax. The party’s Treasury spokesman, lawmaker Ed Balls, suggested he would back an income-tax cut.

“If he wants to cut the basic rate, we will support him in that,” Balls told the same BBC program yesterday.

Cable’s Demands

Ministerial discipline this year contrasts with a year ago, when details of the budget were leaked as both political parties in the coalition sought to shape its policies. Cable’s demands that Osborne deliver a more expansionary budget have dwindled, suggesting he may have won concessions.

Last week, Cable said the “balance of risks has changed” and that “the priority has now to be to get the economy going,” aligning himself closer to Labour than the Tories.

“Once the economy does get going, you generate more tax revenue, there are less people dependent on public spending, and the budget then tends to improve itself,” he told BBC Radio 4 on March 11.

Osborne said today the government will back 81 of the 89 recommendations made by former deputy Prime Minister Michael Heseltine that seek to channel money from London to Britain’s regions to spur growth. Aside from cutting red tape, the government will create a Local Growth Fund in 2015. Regions will compete with one another for money for funding.

Airport Expansion

“The plans will boost the U.K.’s competitiveness nationally and drive local growth,” Cable said in a statement today.

Still, Osborne didn’t adopt some of Heseltine’s more controversial initiatives such as spelling out policy on airport expansion in the southeast of England and forcing local councils to merge services. He also rejected Heseltine’s call for a public-interest test to be applied to foreign takeovers of U.K. companies.

Former Defense Secretary Liam Fox, a Tory, last week advocated tax cuts to be paid for by a freeze in government spending. In a speech last week, Home Secretary Theresa May opened with an allusion to reports she was a possible challenger to Prime Minister David Cameron. The Tories are consistently trailing Labour by about 10 percentage points in national polls.

Growth Weak

Still, Osborne is constrained by the weaker-than-expected economy, which the Ernst & Young ITEM Club says will push Osborne to borrow 8 billion pounds ($12 billion) more in the fiscal year that ends this month. Growth this year will be revised down to about 1 percent from a 1.2 percent forecast in December, said the ITEM Club, an economic forecaster.

Osborne said yesterday help is on the way. He pointed to an increase in the tax-free allowance announced last year and that starts in April, giving households an extra 3.3 billion pounds.

“This country has got to pay its way,” he told the BBC. “We can’t just keep on thinking the answer to our problem is more borrowing. You can’t get out of a debt crisis by borrowing more and more.”

While Osborne normally saves his biggest announcement for his presentation of the budget in Parliament, he said yesterday that he will bring forward to 2016 the 72,000-pound limit that the elderly will have to pay for retirement care. He also promised the early adoption of a flat-rate state pension.

Osborne has also been considering an overhaul of the Bank of England’s mandate to give it greater freedom to support demand. Bank of England Governor-designate Mark Carney earlier this month met the U.K. Treasury’s top civil servant, Nicholas Macpherson, to discuss possible changes to Britain’s monetary policy making, said a person with knowledge of the talks.

Osborne suggested he may offer more help to first-time home buyers by expanding the First Buy Scheme and other programs to support house building.

Gilts Decline

Investors are losing confidence in Osborne’s promises as budget austerity fails to generate economic growth, leading to the world’s worst performance for government bonds.

Gilts have fallen 1 percent this year in currency-adjusted terms, the biggest loss among 26 indexes tracked by Bloomberg and the European Federation of Financial Analysts Societies. The yield on the benchmark 1.75 percent 10-year government note will rise to 2.45 percent by year-end from 1.95 percent two days ago, according to the median of 21 estimates in a Bloomberg News survey.

Gross domestic product fell 0.3 percent in the fourth quarter of 2012, leaving it 3 percentage points below its pre- recession peak, Office for National Statistics data show. Only Italy, where output was 8 points below, is further behind among Group of Seven countries.

Conservatives Trailing

The lack of growth isn’t only turning investors away from U.K. assets. It’s also stoking concern among Conservative Party members that the economy may cost them the next general election, set for 2015.

A ComRes Ltd. poll in the Independent on Sunday yesterday showed support for the Tories was at 28 percent, compared with 37 percent for Labour. The Liberal Democrats were fourth with 9 percent, behind the U.K. Independence Party, which had 17 percent. ComRes interviewed 2,015 adults online on March 13-14.

Osborne “needs to communicate a plan,” Michael Ashcroft, a former Tory treasurer who now conducts political polls, said in an e-mail sent to the media yesterday. “He needs to be clear about how his policies are aimed at creating jobs and wealth, and to focus on competitiveness as much as cuts.”

To contact the reporter on this story: 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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