Britain unveils harsh spending cuts to tackle record deficit

Friday, 29 October 2010 03:00 -     - {{hitsCtrl.values.hits}}

LONDON: Britain said it would cut half a million public sector jobs, raise the retirement age and slash the welfare state as part of the biggest spending cuts in a generation.

After months of bitter negotiations, Conservative finance minister George Osborne confirmed he would press ahead with almost all the spending cuts he had outlined in a June budget.

Capital spending, however, he said would be 2 billion pounds higher per year than originally planned because of the difficulty of getting out of contractual obligations.

"Tackling this budget deficit is unavoidable. The decisions about how we do it are not. There are choices. And today we make them. Investment in the future rather than the bills of past failure. That is our choice," Osborne told parliament.

Economists are split between those who say the drastic action is needed and those who argue it will tip Britain back into recession.

Almost all agree, however, that growth will slow and the Bank of England (BoE) will have to keep monetary policy super-loose for the foreseeable future.

Sterling trims gains against the dollar and slipped versus the euro on Wednesday and some analysts linked the move to Osborne reiterating plans to impose a levy on banks.

Osborne said that the state pension age for men and women will rise to 66 by 2020.

"Raising the state pension age is what many countries are now doing, and will by the end of the next parliament save over 5 billion pounds ($7.9 billion) in a year."

He said he would also cut a further 7 billion pounds off the welfare budget on top of the 11 billion pounds of reductions he identified in June.

Around 490,000 public sector jobs were likely to disappear over the next four years.

Unions have already decried the likely job losses.

But public opposition to the cuts in Britain has so far been muted compared with France, where unions are trying to force a retreat on pension reform with protests including blockades of fuel depots.

The British government is braced for an uproar but Osborne said he had no choice given the need to cut a record budget deficit of 11 percent of gross domestic product (GDP) -- the highest in the G7 -- to around 2 percent in 5 years, a fiscal tightening of some 113 billion pounds ($178 billion), a quarter of which will come from tax rises.

No previous British government has tried anything as ambitious and the National Institute of Economic and Social Research think tank said on Wednesday it thought the government could only push through half the planned cuts.

The latest Reuters/Ipsos MORI political monitor on Tuesday showed 38 percent of people believe the centre-right Conservatives have the best economic policies compared to a quarter who preferred the opposition Labour Party's stance.

The Liberal Democrats, the junior coalition partners, have seen their support plummet in most polls as they have become party to policies they did not support before May's election.

Much will depend on how the economy copes with the fiscal tightening.

For now, the consensus is that Britain will achieve slow growth for a couple of years as the private sector picks up the baton from a deflated public sector. The latest Reuters poll of economists' forecasts is for GDP growth of 1.6 percent this year and 1.8 percent next year.. But some economists say growth could stall because of the cuts.

Many business and consumer confidence measures are already waning even before the measures begin.