Chancellor of the Exchequer George Osborne took aim at welfare spending and the pensions of the rich after an ailing economy blew his deficit-cutting strategy off course.
Osborne announced a broadly neutral fiscal plan for the next four years with a package of measures for companies, while telling the House of Commons in his autumn statement yesterday he no longer expects to meet his debt target and will have to extend austerity well beyond the 2015 general election.
With the economy forecast to shrink by 0.1 percent this year and expand little more than 1 percent in 2013, Osborne is finding it increasingly difficult to stick to the plans on which he staked his political reputation two years ago. He now expects to balance the budget in 2018 instead of 2015, as originally planned, after announcing a 5 billion-pound ($8 billion) spending squeeze from 2017.
“The plan’s still there but it’s going to be the next government implementing it,” said Neville Hill, head of European Economics at Credit Suisse Group AG (CSGN) in London and a former U.K. Treasury official. “It’s pushing austerity back by almost Greek proportions. It’s a case of kicking the can down the road, which the government can afford to do.”
Osborne told lawmakers that his fiscal watchdog, the Office for Budget Responsibility, believes he will miss his target to begin cutting the burden of government debt in 2015-16. Instead, debt as a share of gross domestic product will peak at 79.9 percent in that year, and then start to decline in following years, he said.
While investors say letting the debt target slip was preferable to jeopardizing the recovery by tightening fiscal policy, the risks were highlighted when Fitch Ratings said last night it “weakens the credibility of the U.K.’s fiscal framework, which is one of the factors supporting” the country’s AAA rating.
The National Institute of Economic and Social Research said missing the debt target showed “an unequivocal departure from the government’s original fiscal consolidation plan.” Ten-year gilt yields were up 2 basis points at 1.8 percent as of 9:29 a.m. in London. The pound was little changed against the dollar at $1.6110.
“I do not want to distract from the tough economic situation we face in the world and the public know there are no miracle cures,” Osborne told parliament. “It is a hard road but we are making progress.”
His statement drew attacks from the opposition Labour Party, which said policy was now tilted even further against the poor with welfare spending set to be cut by more than 4 billion pounds, largely through a three-year squeeze on recipients of working-age benefits.
‘He wants you to believe the benefits squeeze is about scroungers, but most people affected will be in work,” Labour’s Treasury spokesman Ed Balls told reporters in London. “Lots of people will be worse off next year.”
Osborne said he will raise an extra 1 billion pounds from higher earners by reducing the tax-free amount people can put into their pension funds to 40,000 pounds a year from 50,000 pounds. He also announced a tax avoidance clampdown on wealthy individuals with Swiss bank accounts, projected to raise 3 billion pounds next year.
Taken together, the measures will take about 8.5 billion pounds from the rich by 2017. The squeeze on the welfare bill, which has a greater effect on those with lower incomes, will raise about 15 billion pounds over the same period.
‘Tough But Fair’
Osborne defended the decisions during broadcast interviews today, saying the richest fifth of Britons are still paying the most toward deficit reduction. He said his welfare cuts were “tough but fair” as out-of-work incomes had risen by 20 percent over the last five years, double the rate of in-work incomes.
Yesterday’s measures also included a 235-pound increase in the amount people can earn before paying income tax, taking the threshold to 9,440 pounds in April 2013.
“If you look at the net effect of this, we’re on the side of people who want to work hard and get on,” Osborne told BBC Radio 4. “What I’ve tried to do, in a very difficult situation where I’m trying to control government spending, is make sure it is done fairly across all incomes.”
The OBR, which predicted in March the economy would expand 0.8 percent this year, said it now forecasts a contraction, with growth of 1.2 percent next year instead of 2 percent. It blamed the downgrade on the euro-region debt crisis.
Osborne announced a range of measures to boost the economy, including a further 1 percentage point cut in corporation tax that will take the rate to 21 percent in 2014 from 24 percent currently as well as increased capital allowances.
An extra 5.5 billion pounds of capital spending was announced for school-building and transport projects, funded largely by cuts to government running costs. Osborne provided relief for motorists by canceling a planned 3 pence-per-liter increase in fuel duty at a cost of about 1.6 billion from 2013. To help pay for the moves, he increased the levy on bank balance sheets to 0.13 percent from January.
“It’s a rehearsal of what the general election campaign will be,” said Steven Fielding, a professor of politics of Nottingham University. “They’ll try to avoid any responsibility for anything that’s gone wrong, and blame everything on Labour. They’re taking from the poorer, and the people in the middle are getting less of the hit.”
Osborne surprised lawmakers by saying the deficit would fall this year, neglecting to say the projections included 3.5 billion pounds from the planned sale of 4G mobile-phone spectrum licences and 11.5 billion pounds from the transfer of profits the Bank of England has accumulated on its quantitative-easing program. Danny Gabay, managing director of Fathom Fianancial Consulting in London, said the claim left “something of a bad taste in the mouth.”
Osborne said the government had used accepted accounting practices and accused Labour of a “desperate attempt” to discredit the figures, having itself scored the sale of 3G licenses against the public finances when it was in power.
The underlying deficit is forecast to fall from 120.3 billion pounds in the current fiscal year to 56.7 billion pounds in 2016-17, representing extra borrowing of more than 100 billion pounds compared with the March forecast.
“The chancellor’s fiscal strategy has been completely derailed,” Balls said in Parliament. “The defined purpose of the government, the cornerstone of the coalition, the one test they set themselves -- to balance the books and get the debt falling by 2015 -- is now in tatters.”
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