UK budget to balance tax breaks with austerity

Reuters News
Posted: Mar 21, 2012 6:50 AM
UK budget to balance tax breaks with austerity

By Matt Falloon

(Reuters) - Finance minister George Osborne unveils Britain's annual budget on Wednesday with politically driven tax measures likely to take pride of place against a backdrop of a limp economic recovery and an unexpected leap in public borrowing.

Mindful of the risk that heavily indebted Britain could lose its prized top-notch credit rating, Osborne says he will not soften an austerity package aimed to reduce sky-high debts.

Official data showing the budget deficit hit a record for the month of February, highlighted the lack of leeway Osborne has to ease his debt-cutting plan.

The government's preferred measure of public sector net borrowing jumped to 15.183 billion pounds ($24 billion) last month to from 8.875 billion pounds in February 2011.

"It doesn't blow everything off course, but the improvement that had been evident for much of the past year has been eliminated, pretty much, in today's numbers," said Ross Walker, analyst at Royal Bank of Scotland.

With little in the coffers to provide meaningful economic stimulus, Osborne will focus on tax measures which he hopes will win support across the coalition government and beyond.

In a move that would please his own party, he is set to cut a 50 percent income tax band for the highest earners. The Conservatives say that high a levy is a barrier to aspiration. The Labour opposition say it is a fair way to spread the pain.

In a nod to the Liberal Democrats, the junior coalition partner, Osborne is expected to raise the income tax threshold by more than previously announced to 9,000 pounds ($14,300), taking more poorly paid people out of the tax net.

Government officials have also disclosed the introduction of a new 7 percent stamp duty rate on sales of property worth more than 2 million pounds, along with an expected corporation tax cut by 2 pence to 24 pence in April.

A Reuters poll on Tuesday found Osborne could struggle to meet his budget targets within the next five years but will cut Britain's debt burden and hold on to the triple-A credit rating.


The UK economy looks set to avoid another recession, and the overall mood among businesses is slowly improving after taking a severe knock from the euro zone crisis at the end of last year.

But growth is still little better than the turtle's pace predicted in November's "Autumn Statement" and borrowing is broadly in line with those forecasts, giving Osborne little chance of claiming victory in deficit reduction or recovery yet.

Minutes from the Bank of England's latest meeting, also released on Wednesday, showed rising concerns about oil prices and future wage inflation, in a sign that the central bankers may be reluctant to extend quantitative easing beyond the current target of 325 billion pounds.

Any hopes for stimulus still rest squarely with the central bank and Wednesday's minutes suggested those chances of more money printing are receding.

Osborne's November statement showed his deficit plans were under strain, adding two more years of austerity after the 2015 election and pointing to a much slower recovery than they expected when they took power in 2010.

Ratings agencies have warned Britain that it could be downgraded, with apparently only Osborne's unwavering determination to cut the deficit keeping them onside for now.

With three years until the next parliamentary election, he has a chance now to push through Conservative-friendly ideas which could prove too risky closer to voting day.

His goal over the next three years is to set the stage for a Conservative majority, without isolating his Lib Dem colleagues.

"The need for fiscal policy to meet the coalition parties' political aims is becoming increasingly important, because the political glue holding the coalition together is weakening," said Citi economist Michael Saunders.

Despite the politics, Osborne is also likely to face calls to do more to get the economy moving.

The government had hoped to woo 20 billion pounds of investment from pension funds for a wave of infrastructure projects that would put Britain, which is slipping down the list of global economic powerhouses, on a better footing.

Only 2 billion pounds have been sourced so far, and credit easing, a means of getting cheaper credit to small businesses, is also seen struggling to get off the ground.

Officials close to Osborne admit their strategy of sticking to an unprecedented austerity plan in the hope that the private sector will take up the slack and drive the economy forward is a high risk one that could cost them dearly at the 2015 election.

Their saving grace so far is an opposition which has failed to capitalize. Labour is likely to demand a softer approach to give the economy room to breathe, an argument that has failed to make headway with voters. ($1 = 0.6307 British pounds)

(Additional reporting by Jonathan Cable, Fiona Shaikh, and Rachelle Younglai in Washington; Editing by Mike Peacock)