Darker growth outlook derails UK austerity plan

Last Updated: Wed, Dec 05, 2012 21:52 hrs

Britain will endure more austerity and break a central debt-cutting promise to cope with weaker growth, the government said on Wednesday, in a bleak outlook that will do nothing to improve Prime Minister David Cameron's re-election chances.

Chancellor George Osborne announced real-terms welfare cuts and said tax rises and spending cuts will drag on for another year into 2017/18 as Britain is held back by the Euro zone debt crisis and a global slowdown.

In a half-yearly budget update to parliament, Osborne said weak growth meant he would be a year late in meeting a self-imposed target of seeing debt fall as a share of Britain's national income by 2015/16.

Missing that goal is an embarrassment for Osborne, who has staked his reputation on wiping out Britain's deficit and cutting public debt. It also raises questions about the safety of Britain's coveted Aaa credit rating.

The opposition Labour Party — which leads Cameron's Conservatives by around 10 points in the polls, two and a half years before a 2015 election — said the austerity drive had failed and was holding back Britain's recovery.

But Osborne said he would not abandon the government's flagship policy.

"Britain is on the right track. Turning back now would be disaster," Osborne told parliament to roars of disapproval from opposition politicians. "It is a hard road, but we are getting there."

The economy was now forecast to grow by only 1.2 per cent in 2013, well down from the 2 per cent predicted in March, Osborne said, citing figures from the independent Office for Budget Responsibility.

The government's fiscal watchdog expected the economy to shrink by 0.1 per cent in 2012, compared to a prediction of 0.8 growth in March, and grow by 2 per cent in 2014, compared to the 2.7 pe rcent previously forecast.

"We suspect the risks to the growth forecasts are slanted to the downside, particularly from 2014 onwards, and that this poses an appreciable risk to the government's new fiscal targets," said Howard Archer, economist at IHS Global Insight.

"This could make life difficult and complicated for the government just ahead of the general election that is due by May 2015."

Although Wednesday's OBR forecasts showed Osborne was set to miss his debt reduction goals, there was less slippage than many economists had expected.

And his primary goal of bringing Britain's structural current budget into balance is still on track to be met in the 2016/17 tax year — in contrast to widespread expectations that this would get pushed back to 2017/18.

But a sluggish economy has wrecked the Conservative-Liberal Democrat coalition's original plan to wipe out a large structural deficit before the next election due in 2015.

The government made dealing with Britain's budget deficit — which hit a record 11.2 per cent of GDP before the 2010 election — its biggest priority when it came to power.

Osborne told parliament that Britain's deficit would fall every year until the next election, adding: "Yes the deficit is still far too high for comfort. We cannot relax our efforts."

Labour accused Osborne of stubbornly sticking to a failed austerity plan that has choked off growth, sapped demand and eroded much-needed tax revenues.

"Today after tow and a half years we can see, and people can feel in the country, the true scale of this government's economic failure," Labour finance spokesman Ed Balls told parliament.

Balls asked if the Euro zone was such a drag on the UK's recovery, why had the currency area grown faster than Britain.

"It is simply reckless and deeply irresponsible of this Chancellor to plough on with a fiscal plan we all know is failing on the terms he set," he said.

The government's watchdog said 1.1 million public sector jobs would be lost by 2018 because of further spending cuts in 2017-18. The Trades Union Congress said Osborne had offered "pain without purpose".

Cameron has had a bruising year marked by weak growth, criticism of his austerity measures and an unpopular budget in March that led to a series of policy U-turns.

Osborne says he had no choice but to deal with a record budget deficit left by the last Labour government, which was voted out in 2010. As a result, he said investors still flocked to the British government bond market, keeping borrowing costs at record lows.

Nonetheless, Britain could be in danger of losing its prized Aaa credit rating before long.

"Fiscal slippage is creeping in. The question is 'How will the ratings agencies take this?'," said Peter Dixon, an economist at Commerzbank. "His fiscal strategy is sailing very close to the rocks."

In a raft of announcements, Osborne said he would consult on new tax incentives for the shale gas industry, extend a high-speed rail line into northwest England and launch a new £1.5-billion finance facility to support UK exports.

Under pressure to do more to restore growth, he said he would cut the main rate of corporation tax by a further 1 per cent. It will stand at 21 per cent from April 2014.

Banks will not benefit, however, as a levy on their balance sheets will rise to 0.130 per cent to offset any benefit. And unemployment benefit will only rise by 1 per cent a year for the next three years, rather than the normal inflation-linked rise.

In total, the measures were "fiscally neutral", Osborne said, neither pushing money into nor taking it out of the economy.

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