Chancellor of the Exchequer George Osborne sought to pacify U.K. voters hit by his deficit-reduction plans and a sluggish economy with money taken from oil companies, banks and the wealthy.
Osborne’s annual budget in the House of Commons yesterday left his plans for the biggest fiscal consolidation since World War II intact even as he cut fuel duty and lowered the income-tax bill for most Britons to alleviate the squeeze on living standards. Dubbing it a “budget for growth,” Osborne cut company tax to 26 percent before clawing back money through a higher bank levy and increased charges on North Sea oil.
“The people who lost in the budget were the oil companies, rich people who avoid tax and polluters,” Osborne said in an ITV interview this morning. “The winners were motorists with that fuel-duty cut, working families and businesses.”
Almost a year into government, Prime Minister David Cameron is seeking to reverse lagging opinion-poll ratings and prepare the path for tax cuts before the next election, due in 2015. The challenge for Osborne is to make voters feel better about their economic prospects without unsettling investors who are banking on him seeing through plans to all but eliminate the deficit.
The budget was “impressively populist even though the wider macroeconomic situation is appalling,” Andrew Hawkins, chairman of London-based polling company ComRes Ltd., said in a telephone interview. “This budget sets a different tone. The emergency budget last year was bleak. He is now telling people that he is a tax-cutter, something we haven’t heard from the coalition yet.”
The main opposition Labour Party has opened a poll lead of as much as 11 percentage points over Cameron’s Conservatives as their coalition with Nick Clegg’s Liberal Democrats makes cuts that will see the loss of 310,000 public-sector jobs. Labour is telling voters that Osborne is going too far and too fast at a time when the economy is struggling and inflation is at its highest for more than two years.
The pound fell for a second day, dropping 0.6 percent to $1.6146 as of 1:38 p.m. in London. The yield on the 10-year gilt rose 1 basis point to 3.57 percent.
Labour leader Ed Miliband, responding to Osborne’s statement in Parliament, sought to draw parallels with previous Conservative administrations that he said had allowed unemployment to soar. Miliband mocked Osborne’s statement as “a budget for growth that downgrades the growth forecast.”
Osborne told the House that the Office for Budget Responsibility now predicts the economy will expand 1.7 percent in 2011, down from the previous forecast of 2.1 percent.
“The chancellor spoke for an hour but one fact said it all,” Miliband said. “Growth down last year, this year and next year. It’s the same old Tories. It’s hurting but it isn’t working.”
As Labour lawmakers joined in chanting, Miliband said of Osborne: “His three priorities for the year were growth, growth, growth, and what happened in this budget? Growth down, down, down.”
Moody’s Investors Service said the prospect of Britain retaining its top credit grade is driven by economic growth and the fiscal plans. Osborne’s statement “indicates that the U.K. has the willingness to meet these challenges,” it said.
While the lower growth forecasts “do not directly cast doubt” on the grade, “slower growth combined with weaker-than-expected fiscal consolidation could cause the U.K.’s debt metrics to deteriorate to a point that would be inconsistent with an Aaa rating,” Moody’s said.
North Sea Oil
The OBR said today that the outlook may be jeopardized by further gains in oil prices. “If inflation doesn’t fall in 2012, that will undermine our growth forecasts,” said Stephen Nickell, a member of the three-person committee.
Among his headline measures, Osborne raised oil production taxes to pay for a cut in fuel duty aimed at helping drivers paying record gasoline prices. The supplementary charge on North Sea oil profits went up to 32 percent from 20 percent, while Osborne lowered the tax on gasoline pump prices by 1 penny a liter and delayed a planned increase in line with inflation for a year.
“The cut in fuel duty was politically astute as it was better than people expected,” Wyn Grant, professor of politics at Warwick University, said in a telephone interview.
“I know that by itself it will not end the pressure on family budgets, but we’ve done what we can to help,” Osborne said of the fuel-duty cut. He said his deficit-reduction policy was keeping interest rates low, which would help families by speeding economic recovery.
‘No Funny Business’
Osborne spent the morning after the budget on television rebutting suggestions by interviewers that oil companies would seek to pass on the higher tax on profits by charging more at the pumps.
“We will be watching like a hawk to make sure motorists get the benefit of the changes and there is no funny business,” he told ITV.
Osborne increased by 630 pounds ($1,024) to 8,105 pounds the amount a person can earn without paying tax, providing a 120-pound tax cut to most earners. By abandoning last year’s plan to lower the threshold at which people start paying the middle 40 percent rate of tax, Osborne avoided creating more losers from a cut to child benefit he proposed in October.
“It is a budget about carrying on taking the medicine,” said Grant. “Follow on the course from last year but here’s a couple of aspirin for your pain.”
For 10,000 people earning less than 60,000 pounds a year who are buying their first home, Osborne offered 250 million pounds in interest-free loans.
Still, yesterday’s plans failed to fully offset the effect on households since Osborne became chancellor in May. His tax and spending plans leave household incomes on average about 1.5 percent worse off, with the top and bottom deciles suffering even more, according to budget documents.
“The pressure to flinch will now mount,” Andrew Tyrie, the Conservative lawmaker who chairs Parliament’s Treasury Committee, told Osborne. “We simply mustn’t do so.”
The measures for households come alongside help for companies, with a 2 percentage-point cut in corporation tax next month followed by a further 1 point cut in each of the next three years. That will take it to 23 percent, “making it the lowest in the G-7,” Osborne said.
Banks, though, face an increase in the levy on their balance sheets to 0.078 percent starting in January 2012 to offset any gains from company tax. Osborne also announced help for small companies with new tax reliefs and tax credits.
Business groups welcomed the budget, saying the measures will help the economy overcome a slump in the fourth quarter of last year. Retail sales dropped 0.8 percent in February, more than economists forecast, the Office for National Statistics said today.
“This budget will help businesses grow and create jobs,” John Cridland, director general of the Confederation of British Industry, the country’s biggest employers’ group, said in a statement.
In order to claw back the money spent on tax reductions without altering his deficit plans, Osborne said he’d squeeze about 1 billion pounds a year from the rich, including a clampdown on “disguised remuneration” payments, which includes employees benefiting from getting compensation in shares at a later date.
A 30,000-pound annual charge on people domiciled elsewhere for tax purposes who’ve lived in the U.K. for seven years will rise to 50,000 pounds for those in the country for more than 12 years, Osborne said. In return, he said, income remitted to the U.K. for investment in British businesses won’t be taxed. He also pledged not to change the tax status of the non-domiciled again before 2015.
For the wealthy, though, Osborne held out the prospect of abolishing the 50 percent top rate of income tax in the future.
“I am clear that the 50-pence tax rate would do lasting damage to our economy if it were to become permanent,” Osborne said. “That is why I regard it as a temporary measure.”
Underlying the measures to alleviate the difficulties facing many households is a deteriorating economic outlook over the next three years. The OBR said the economy will be almost 1 percent smaller next year than it expected in November, though it forecast growth quickening to 2.9 percent in 2013 and 2014.
“These forecasts look incredibly optimistic compared to everybody else,” David Blanchflower, professor of economics at Dartmouth College and a former policy maker at the Bank of England, said in an interview with Bloomberg Television. “The budget is fiscally neutral, so how can it be a budget for growth? I really don’t get it. This is economics by crossing your fingers: It lowers growth and raises unemployment.”
The deficit plan, while broadly on track, will require an extra 43 billion pounds of borrowing by 2016 compared with a November forecast. The position would be improved by a sale of the British taxpayer’s 65.8 billion-pound stake in Lloyds Banking Group Plc and Royal Bank of Scotland Group Plc, which is likely to start next year, according to four people familiar with the talks.
Unemployment will peak at 8.2 percent of the workforce this year and inflation will be 4.2 percent, the OBR said.
“We still a have very difficult deficit-reduction plan and a lot will come down to achieving those spending cuts,” Ross Walker, chief U.K. economist at Royal Bank of Scotland Group Plc, said in a telephone interview. “It was a neutral budget -- there was never any significant leeway for him.”