UK sticks with austerity plan

Chancellor of the Exchequer unveils tough Budget despite fears of another recession.

George Osborne's Budget is focused on debt reduction. Photo / AP
George Osborne's Budget is focused on debt reduction. Photo / AP

Britain's Treasury chief unveiled another tough Budget yesterday despite weakness in the economy that raised fears of a third recession in just over four years.

Though he offered beer drinkers and car drivers a tax break, no doubt a popular move among some, and provided incentives for home-buyers and investments in infrastructure projects, George Osborne showed the Conservative-led Government remains convinced debt-reduction is the best way forward for Europe's third-largest economy.

"We are slowly but surely fixing our country's economic wrongs," Osborne said.

It's not a view shared by all.

After three years of austerity, Britain is borrowing more than he first thought and growing far more slowly than expected.

Labour Party leader Ed Miliband said the Budget was "more of the same" from a Government that has failed to revive the economy after its deepest recession since World War II and presided over the loss of the country's triple A credit rating from Moody's Investors Service.

"Today, the Chancellor joined Twitter," Miliband said. "He could have got it all in 140 characters: Growth down. Borrowing up. Families hit. And millionaires laughing all the way to the bank. Hashtag: downgraded chancellor."

While insisting his approach was the only way to tackle the economy's problems head on, Osborne conceded the forecasts from the independent Office for Budget Responsibility were more downbeat than four months ago.

The growth forecast for this year, for example, was halved to just 0.6 per cent, providing Osborne with even less room to manoeuvre as a flat-lining economy keeps a lid on revenues and maintains the upward pressure on welfare spending.

And though growth next year is tipped to triple to 1.8 per cent, down from a predicted 2 per cent, it's still below the country's long-run average and a fairly uncomfortable backdrop to the expected election the next year.

The economy shrank by 0.3 per cent in the last three months of 2012, and many analysts have predicted another contraction in the first quarter of this year. That would put Britain back into a recession - technically defined as two consecutive quarters of economic contraction.

Osborne admitted the recovery was taking "longer than anyone hoped", saying Europe's problems were holding Britain back.

The 17 European Union nations that use the euro account for about 40 per cent of British exports and many of them are in recession, some of them severe.

Cyprus' crisis will hardly help inspire confidence. "We are still very exposed to what happens on the continent," said Osborne, who confirmed that British military and government staff on the island would not lose out if a raid on deposits goes ahead.

Because growth has disappointed over the past few years, the Government has struggled to get its public finances into shape.

The budget office now reckons public debt will continue rising until 2016-17, peaking at 85.6 per cent of Britain's annual gross domestic product. Its December forecast estimated debt would peak at 79.9 per cent in 2015-16.

Osborne did tinker a bit with the remit of the Bank of England giving it the chance to employ forward-looking guidance for interest rate expectations, similar to the approach now taken at the United States Federal Reserve.

"But this is not as bold a change as many were probably hoping for," said Vicky Redwood, chief UK economist at Capital Economics.

Many expect further changes to the Bank of England's remit when Bank of Canada chief Mark Carney takes the helm this year.

Osborne said some government departments would be told to free up money and £3 billion ($5.4 billion) would be diverted to infrastructure projects.

Coalition partners the Liberal Democrats have been pushing for more projects funded by borrowing in the hope of supporting economic growth.

The latest figures show unemployment rising by 7000 between November and January to 2.52 million, caused by more 18-24 year olds becoming unemployed.

Despite the rise, the rate remained at 7.8 per cent, compared with 8.3 per cent a year ago.

- AP

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