Tough love budget hits all
Every family in the United Kingdom will feel the austerity measures imposed by the chancellor of the exchequer, George Osborne, on Tuesday. He announced a £40-billion package of emergency tax increases, welfare cuts and civil service spending restraints designed to slash the UK’s budget deficit by the end of the parliamentary session.
Osborne said the ‘unavoidable budget” required a VAT rise from 17,5% to 20% in January, higher capital gains tax, a levy on banks, a two-year public sector pay freeze and less generous benefits. The package was needed to prevent the financial markets from turning on Britain, he said.
In his debut budget speech, Osborne pleased the ratings agencies and the Organisation for Economic Co-operation and Development (OECD).
But he signalled a second dose of gloom in October, when a three-year comprehensive spending review will spell out the size of the cuts for individual government departments.
Osborne warned on Tuesday that ring-fencing the state-funded National Health Service and international development meant non-protected departments would face average real cuts of 25% but that some clemency would be shown to education and defence.
The chancellor avoided even deeper cuts in the civil service by earmarking the welfare budget for more than a third—£11-billion—of the £32-billion reduction in spending.
Child benefits will be frozen and the government will eventually save almost £6-billion a year by linking all state benefits other than pensions to the slower-growing consumer price index rather than the retail price index.
The treasury will raise more than £12-billion from the increase in VAT, but the chancellor sought to soften the blow by raising personal allowances by £1 000, linking pensions to earnings and raising child credits for the next two years.
He said a four-year phased cut in corporation tax would help the private sector become the engine of growth and the economy would have to rely more heavily on investment and exports in the coming years.
Seeking to pin the blame for the tough measures on the previous prime minister, Labour’s Gordon Brown, the chancellor said: ‘Today we have paid the debts of a failed past. And laid the foundations for a more prosperous future. The richest paying the most and the vulnerable protected. That is our approach. Prosperity for all. That is our goal.”
Osborne rejected criticism from the Opposition Labour Party that the budget threatened to derail the recovery, saying that the independent Office for Budget Responsibility had only marginally reduced its forecasts for growth this year and next as a result of Tuesday’s spending cuts and tax increases.
The need to placate the markets after the sovereign debt crisis in the euro area last month meant the pace of deficit reduction had to be accelerated, the chancellor said. Net borrowing—a combination of the running costs of government and spending on infrastructure projects—will fall from 10,1% of national output to 1,1% within five years.
The budget measures are designed to turn a structural deficit in current spending of 4,8% of GDP into a surplus of 0,3% in four years, holding out the prospect of pre-election tax cuts if the economy performs as the chancellor expects.
On Tuesday the ratings agency Fitch said the budget would ‘materially strengthen confidence” in the country’s public finances, while the OECD, the Paris-based think-tank for developed country governments, praised Osborne for his ‘courage”.
Harriet Harman, the interim Labour leader, picked out the Liberal Democrats for attack, saying: ‘This reckless Tory budget would not be possible without the Lib Dems. The Lib Dems denounced early cuts, now they are backing them.
Osborne told the House of Commons: ‘In this budget everyone will be asked to contribute, but in return we make this commitment. Everyone will share the rewards when we succeed. When we say that we are all in this together we mean it.”
But he faces the charge that he has gone further than he needs to to accelerate the deficit reduction.—