Bloomberg News

Osborne Won’t Borrow to Finance U.K. Budget

February 26, 2012

George Osborne, U.K. chancellor of the exchequer, walks to a meeting with Jun Azumi, Japan's finance minister, not pictured, at the Ministry of Finance in Tokyo, Japan, on Wednesday, Jan. 18, 2012. Photographer: Tomohiro Ohsumi/Bloomberg

George Osborne, U.K. chancellor of the exchequer, walks to a meeting with Jun Azumi, Japan's finance minister, not pictured, at the Ministry of Finance in Tokyo, Japan, on Wednesday, Jan. 18, 2012. Photographer: Tomohiro Ohsumi/Bloomberg

Chancellor of the Exchequer George Osborne said he won’t borrow money to fund tax cuts or increase spending in the 2012 budget, paving the way for increased political tension among members of the coalition government.

Figures showing the U.K. budget deficit may be less than expected have prompted calls from Liberal Democrat coalition partners for an increase in the threshold at which workers start paying income tax, while lawmakers in Osborne’s own Conservative Party want tax cuts on fuel, according to press reports. Osborne said any giveaways in the March 21 budget will be offset by higher taxes or spending cuts in other areas.

“I have a deficit plan and I am intending to stick to it,” Osborne said in an interview in Mexico City. “If there were to be any additional spending commitments or tax cuts they would have to be paid for. We would have to find countervailing measures to pay for them. I don’t think I am going to go in for deficit-financed tax reductions or spending increases.”

Osborne said this month he will stick to budget cuts that will see more than 700,000 public-sector jobs axed in the tightest fiscal squeeze since World War II. He said he’ll continue with plans to erase the bulk of a budget deficit that equals 9 percent of gross domestic product by 2017, after Moody’s Investors Service said Feb. 14 that Britain may lose its Aaa credit rating.

The budget deficit for the first 10 months of the fiscal year was 93.5 billion pounds compared with a 109.1 billion deficit a year earlier, government figures for January showed last week. That would give Osborne leeway to cut taxes or increase public spending without breaching his 127 billion-pound deficit target for 2012, according to Chris Williamson, an economist at Markit in London.

Reduced Pension Relief

Osborne is considering proposals to reduce higher earners’ tax relief on pensions in order to help fund a plan to raise the country’s income-tax threshold to 10,000 pounds ($15,714), the Financial Times reported on Feb. 14, citing an unidentified person close to the chancellor. The Independent said yesterday that Osborne may increase that threshold to 9,000 pounds by the fiscal year starting April 2013 from 7,475 in the current year, costing the Treasury 4.6 billion pounds.

Osborne and Prime Minister David Cameron have been discussing the plans with Deputy Prime Minister Nick Clegg and Treasury Chief Secretary Danny Alexander, the FT said. The current system offers tax relief on money paid into pension plans to a maximum of 50,000 pounds.

Fuel Taxes

Meanwhile, the FT said Feb. 25 Osborne will rule out any further fuel tax cuts in next month’s budget after providing more than 4 billion pounds of support, according to unidentified aides.

Osborne rejected comments from former Defence Secretary Liam Fox who said the Liberal Democrats were having a disproportionately large say in policy relative to the amount of seats they have in parliament.

“We have a coalition, we have a coalition agreement,” Osborne said. “We are implementing the coalition agreement and that is the basis upon which this government is formed and that is the basis upon which the people in the cabinet operate.”

A neutral budget will do little to fend off attacks from the opposition Labour Party, which wants to see a larger deficit used to fund a tax cut. The Moody’s warning triggered an attack from Labour, which said the pace of budget cuts is hurting confidence in an economy struggling to avoid a second recession in three years. Osborne says his approach has helped to maintain the top debt rating -- a keystone of government policy -- pushed gilt yields lower and given room for the central bank to loosen monetary policy.

Giving and Taking

“People will be on the lookout for the Chancellor giving with one hand and taking away with the other,” Rachel Reeves, a Labour Party lawmaker who speaks on Treasury affairs, said in an e-mailed statement from her office. “Labour is calling for substantial and fair tax cuts.”

Moody’s said Osborne needs to stick to his plan to maintain investor confidence. Even then, the U.K. will be vulnerable to shocks given the limited room for a policy response.

Moody’s warning, which carries a one-in-three chance of an outright downgrade, comes less than three months after the debt crisis led Osborne’s fiscal watchdog to cut its growth forecasts and predict the budget deficit through March 2016 will be 112 billion pounds ($178 billion) higher than it previously thought.

The National Institute of Economic and Social Research forecasts the U.K. economy will shrink 0.1 percent this year and grow 2.3 percent in 2013, compared with projections in October for growth of 0.8 percent and 2.6 percent.

Separately, Osborne said a plan to provide cheap loans for small companies -- which he has described as “credit easing” - - will go ahead by the budget even though some banks including HSBC Holdings Plc may not sign up to the program.

“I am pretty happy with the way it is coming together and with the participation, and obviously it has an additional benefit to banks who have a higher funding cost,” he said. “There is going to be a broad participation and, ultimately, it’s up to individual banks whether they take part or not. I can’t force anyone to take part.”

To contact the reporter on this story: Gonzalo Vina in Mexico City at gvina@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net


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