Chancellor of the Exchequer George Osborne detailed the deepest budget cuts ever in Britain, eliminating almost 500,000 public-sector jobs and imposing a levy on banks to extract the “maximum sustainable” revenue.
“Today’s the day when Britain steps back from the brink,” Osborne told lawmakers in the House of Commons in London today as he outlined plans to virtually eliminate a 156 billion-pound ($245 billion) budget deficit. It’s “a day of rebuilding when we set out a four-year plan to put our public services and welfare state on a sustainable footing.”
At stake is Britain’s top credit rating, a fragile recovery from its longest recession on record and the future shape of the postwar welfare state. Investors said they’re concerned Osborne, 39, the youngest chancellor since 1886, will have difficulty delivering on the promises, which include a cut of 7 billion pounds from the welfare bill.
By reducing departmental spending by an average of 19 percent instead of the 25 percent he first estimated, Osborne relied more on trimming welfare, Hetal Mehta, an economist at Daiwa Capital Markets Europe Ltd. and a former U.K. Treasury official said. “Unlike more easily identifiable spending cuts such as a naval ship or a new school, reducing welfare payments is traditionally more difficult to both achieve and forecast.”
The plans would reduce public spending by 81 billion pounds after inflation, narrowing a deficit that the government forecasts at 10.1 percent of gross domestic product this year to 2.1 percent in the 2014-15 fiscal year. Debt interest costs would fall by more than 5 billion pounds by 2015.
The pound rose 0.9 percent to $1.5846 at 3:45 p.m. in London. It weakened 0.8 percent against the euro to 88 pence.
Legislation to impose a permanent levy on banks will be published tomorrow, Osborne said.
“We neither want to let banks off making their fair contribution, nor do we want to drive them abroad,” he said. “Our aim will be to extract the maximum sustainable tax revenues from financial services. We will assess what those maximum revenues could be -- not just in one year, but over a period of years.”
In a June 22 budget blueprint, Osborne said he intended to raise more than 2 billion pounds a year through a tax on bank balance sheets.
Osborne said he agreed with the Office for Budget Responsibility estimate that 490,000 public-sector workers will lose their jobs over four years. He said much of that will be achieved by not filling vacant posts.
Cuts in welfare spending will total 7 billion pounds a year through a cap in benefits to unemployed families at the average working family’s income and a curb on payments for housing subsidies and tax credits. The retirement age will rise to 66 by 2020, earlier than projected.
The opposition Labour Party said the cuts were driven by ideology more than necessity.
“We have seen people cheering the deepest cuts to public spending in living memory,” said Alan Johnson, Labour’s Treasury spokesman. “This is what they came into politics for. Today is the day that abstract figures and spreadsheets turn into people’s jobs and people’s futures.”
Before today, the government plans to trim the budget had won over investors. Gilts have returned 6.6 percent since David Cameron replaced Labour Prime Minister Gordon Brown in May, more than the 3.8 percent gain by German bunds and the 5.9 percent increase in U.S. Treasuries, show indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. The pound has gained more than 5 percent against the dollar.
Osborne said a 6 billion-pound cut in central government spending was double what he estimated in June. Funds for local governments will fall 7.1 percent by 2015 and money for the royal family will be frozen next year.
The Foreign Office will see its funding cut by 24 percent and the Ministry of Justice will be cut by an average of 6 percent a year.
Labor unions said the lack of detail from the chancellor hid the true impact the cuts will have and said they will depress the economy, leading to a million job losses.
“Right across government, the chancellor has announced eye-watering cuts that will have a desperate impact on communities, business and hard-pressed families but he has not had the guts to spell out the detail,” said Brendan Barber, general secretary of the 6.2 million member Trades Union Congress. “There will be plenty of pain, but little to gain.”
Divisions on the implementation of cuts have already emerged within the government, with Chris Huhne, the Liberal Democrat Energy Secretary, saying on Oct. 8 that the government may need to change its plans if the economy fails to strengthen. Lawmakers from Cameron’s own Conservative Party have questioned the implementation of cuts in child-benefit payments to 1 million better-off families.
Cameron pledged before the election to protect spending on the National Health Service, which provides free medical treatment for everyone resident in Britain, and to maintain spending on foreign aid. Those pledges, which were opposed by the Liberal Democrats before the election, have increased the pressure for cuts on other departments.