U.K. Chancellor of the Exchequer George Osborne held firm to his austerity plan as the economy continues to stagnate, saying government spending cuts will carry on for three years after the 2015 election.
As official growth forecasts were further downgraded, Osborne sought in his budget speech to Parliament yesterday to regain voters’ support. He announced tax cuts for low earners and companies and measures to boost home ownership, all financed by a squeeze on departmental budgets and a renewed crackdown on tax avoiders.
The chancellor has come under increasing pressure from voters and members of his own Conservative Party after policy U-turns on last year’s budget began an erosion of trust in his ability to manage an economy that’s on the brink of a triple-dip recession. While yesterday’s measures may alleviate some of that pressure, Britain’s economic difficulties are likely to weigh on the Tories’ chances of retaining power under Prime Minister David Cameron in 2015.
“This is Osborne’s gamble; he’s hanging in there with austerity in the hope things get better for the election,” said Mark Wickham-Jones, professor of politics at Bristol University. “The rhetoric is unyielding. There is fiddling with policies here and there, but if things don’t get better there are going to be a lot of nerves by next year.”
Osborne told BBC Television this morning there will be “more difficult decisions” to be taken on public spending in the next couple of months in negotiations with ministers over further budget cuts. “If your question to me is, do we need to do more to tackle the nation’s deficit and debt, I agree with you,” he said.
The chancellor said in 2010 he would get rid of Britain’s budget deficit by 2015 in order to protect the top credit rating on government bonds. He has failed to do both, and recent data have fueled concern that Britain may be back in recession, after a 0.3 percent contraction in the final three months of 2012.
A pre-budget ComRes Ltd. poll found 44 percent of respondents saying Osborne should be replaced, against 18 percent saying he should stay in his job. The Tories are running consistently 10 points behind the opposition Labour Party in national polls of voting intention.
Tory former Defense Secretary Liam Fox has advocated tax cuts to be paid for by a freeze in government spending. Home Secretary Theresa May and Defense Secretary Philip Hammond were both resisting efforts by Osborne to reduce their budgets.
The Office for Budget Responsibility predicted yesterday that the economy will grow by 0.6 percent this year, half of what it forecast in December. The expansion will be weaker in than expected in 2014, at 1.8 percent instead of 2 percent.
The deficit will be 120.9 billion pounds ($183 billion) in the fiscal year that ends this month, 1 billion pounds higher than the OBR previously forecast. Even so, recent squeezes to departmental budgets mean Osborne will achieve his target of having a smaller deficit than last year by 100 million pounds -- a rounding error in the 720 billion pounds of government spending.
Osborne said he would stick to the same fiscal course while providing the Bank of England with greater scope to stimulate demand. He announced a new mandate for the central bank, though he kept its 2 percent inflation target. The pound whipsawed during the chancellor’s speech.
“It is taking longer than anyone hoped, but we must hold to the right track,” Osborne told lawmakers. “I will be straight with the country: another bout of economic storms in the euro zone would hit Britain’s economic fortunes hard again.”
Labour leader Ed Miliband attacked Osborne for imposing more sacrifice on the country.
“This is the chancellor’s fourth budget, but one thing unites them all,” Miliband said. “Every budget he brings to this house has been worse, not better, for the country. All he offers is more of the same. Higher borrowing and lower growth.”
Against this backdrop of weak growth and high public debt, Osborne outlined changes to tax and spending policies within the confines of a fiscally neutral budget.
He squeezed departmental budgets by 2.4 billion pounds over the next two fiscal years to help pay for 3 billion pounds of support for the housing sector.
Tax-avoidance measures aimed at companies and offshore financial centers will raise 4.9 billion pounds in the next five fiscal years, to fund a freeze in fuel duty and a 1-penny cut on the tax paid on every pint of beer.
Similarly, a further squeeze on departmental budgets after 2015 will help fund almost 8 billion pounds of tax cuts for companies.
“He’s made the little he had go as far as it possibly could in political terms,” Rick Nye, a pollster with Populus Ltd., said in an interview.
The squeeze on departmental budgets will win Osborne support from rank-and-file members of his party who’ve been calling for lower spending, while at the same time causing concerns to ministers who have to implement the cuts.
Osborne said there will be reductions of 11.5 billion pounds in the fiscal year that starts a month before the May 2015 election, with health, schools and overseas aid excluded. Ministries will have to find further savings of 3.3 billion pounds in each of the following two years, he said.
Osborne’s “aspiration budget,” designed to show voters that he is trying to support working families, also included child-care funding of 1.9 billion pounds over three years that starts a month before voters go to the polls.
“There are things in the budget that many Tories will like but it is not immediately obvious, aside perhaps from the housing measures, what is going to make a difference with voters between now and May 2015,” said John Curtice, a professor of politics at Strathclyde University in Glasgow, Scotland.
Still, Labour urged voters to focus on the bigger picture: the lack of economic growth and the continued fragility of the public finances.
“This wasn’t a budget about the measures, it was about the updating of the strategy,” its Treasury spokesman, Ed Balls, told reporters. “It isn’t a change in the strategy, it’s more of the same. All that changes is the scale of the problem, because the plan’s not working.”
Cameron, though, still has two years until the election. At an Easter reception in his Downing Street office last night, the prime minister recounted how, when he was running for the leadership of his party in 2005, Osborne “told me to call it all off, it wasn’t going anywhere.” Easter, he went on, was the most important Christian festival.
“It’s all about, for me, the triumph of life over death,” he said. “Which in politics is always useful.”