Osborne Prepares Austere U.K. Budget as Political Attacks Ease

Chancellor of the Exchequer George Osborne promised another austere budget as calls to stimulate the U.K. economy became more muted, easing political pressure on the government.

Osborne said the problems facing Cyprus are a reminder of what financial markets will do to nations that fail to act, and suggested the March 20 annual budget will be free of giveaways. 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.

“There is no easy answer, there is no miracle cure,” Osborne told BBC1 Television in London today. “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 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.

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.

Former Defense Secretary Liam Fox, a Tory, on the same day 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.

Household Spending

Osborne today said he wants to see more capital spending and made decisions in December to increase expenditure on infrastructure by cutting the budget elsewhere. Osborne also 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 ($5 billion).

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

While Osborne normally saves the biggest announcement when he presents the budget in Parliament, he said today 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.

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 fell 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.

GDP 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.

The lack of growth is not 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.

Voters are also turning away from Osborne and Cameron. A ComRes Ltd poll in the Independent on Sunday today showed support for the Tories was at 28 percent, compared with 37 percent for Labour. The LibDems 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.

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