Frugality And Responsibility Cue The Biggest Public Spending Cuts In 100 Years This Autumn

George Osborne outside No. 11

NO SMILING FACES accompanied the Chancellor’s battered despatch case on its last outing to the commons, yesterday. Its contents were nothing to smile about.

Thirteen years of the last Labour government’s spending binge had left the UK with a structural deficit in which its debt would still be rising in 2014/15 to 74.4 per cent of GDP – and with annual debt interest payments set to reach £67 billion in that year.

The situation, George Osborne explained, was unsustainable.

Faced with the need to raise enough additional revenue to pay-down Britain’s record debt, the coalition government had no alternative but to raise VAT from its current level of 17.5 per cent to 20 percent from 4th January 2011; but the tax would not be extended to include currently exempt items like fresh food and children’s clothes. But the Chancellor acknowledged that the regressive tax hits the poorest in society most, and that he had modified other parts of the taxation system to mitigate this effect.

There is to be a £1,000 increase in the personal allowance – and there will be no increase in alcohol, tobacco, or petrol duty. Moreover, by reducing the level of the basic rate limit and the National Insurance Upper Earnings/Profit Limit to keep it aligned with the income tax higher rate threshold, the Chancellor ensured that higher rate tax payers would not benefit from the measure.

From 23 June 2010, capital gains tax will rise from 18 to 28 per cent for those with total income and taxable gains above the higher rate threshold; and the 10 per cent capital gains tax rate for entrepreneurial business activities will be extended from the first £2 million to the first £5 million of qualifying gains made over a lifetime. It was also confirmed that the annual exempt amount for capital gains tax will continue to rise in line with inflation and will remain at £10,100 for 2010-11.

To reign-in the country’s deficit, Osborne proposed to raise around 20 per cent of the additional funds needed through taxation – and 80 per cent through cuts in public expenditure; but the vast majority of the latter’s detail will not be announced until Autumn’s budget, which will see the majority of departments trying to cope with 25 per cent cuts.

As predicted, changes to the benefits system were announced to ensure that those whom are able to are encouraged to find work. Housing benefit would, at long last, be capped (at £280 per week for a single bedroom flat to £400 per week for a four-bedroom or larger property) and time-limited for claimants who can be expected to look for work. Housing Benefit for working age claimants in the social rented sector, who are occupying a larger property than their household size warrants, is also to be restricted.

Support for Mortgage Interest will be paid at the level of the Bank of England’s
published Average Mortgage Rate from October 2010.

Disability Living Allowance will be subject to objective medical assessments from 2013/14 and Child Allowance will be frozen for the next three years. In addition, tax credit eligibility for families with a household income above £40,000 will be reduced from April 2011 and further changes will be made to the threshold in 2012/13 to focus tax credits on lower income families. The Government also announced that it will increase the rate at which tax credits are withdrawn once household incomes rise.

Those lone parents with their youngest child over five will be moved onto Jobseekers Allowance rather than Income Support from 2011-12; and from April 2011 the government will restrict eligibility to the Sure Start Maternity Grant to the first child only and abolish the Health in Pregnancy Grant from January 2011.

The Chancellor announced that the government will use the CPI for the price indexation of benefits and tax credits from April 2011. The change will also apply to
public service pensions through the statutory link to the indexation of the Second State Pension.

The basic State Pension will be uprated by a triple guarantee of earnings, prices or 2.5 per cent, whichever is highest, from April 2011; and it will increase in April 2011 by at least the equivalent of RPI.

From April 2011, the government will end the existing rules that create an effective obligation upon private pension holders to purchase an annuity.

With 25 per cent cuts in departmental spending on their way in the Autumn, George Osborne laid out changes aimed at encouraging the private sector to expand and take-on more staff.

The main rate of corporation tax will be reduced from 28 per cent to 24 per cent over the course of four financial years from April 2011; the small profits rate to 20 per cent, instead of the planned increase to 22 per cent, from April 2011.

There is, however, to be a reduction in the capital allowances main rate from 20 per cent to 18 per cent, and the special rate is to be reduced from 10 per cent to 8 per cent from April 2012. Similarly, there is to be a reduction in the Annual Investment Allowance from £100,000 to £25,000 from April 2012.

The Emergency Budget was broadly welcomed as being both necessarily firm and fair; but the real pain, for Castle Point residents, will not be apparent until the Autumn when those 25 per cent cuts are announced…

IFS: Recession Worse Than It Should Have Been Due To Labour Spending

(Telegraph) – THE RECESSION was far worse that it should have been because Gordon Brown allowed spending to spiral out of control, a damning report has claimed.

The study from the independent Institute of Fiscal Studies blamed Mr Brown for over-spending before 2007 for the severity of the recession faced by Britons.

Mr Brown’s policies as Chancellor meant that Britain is now suffering from “one of the weakest fiscal positions” among developed countries, the IFS said.

This was because Mr Brown had refused to match spending rises with tax increases after 2001, forcing the UK to borrow heavily up to and through the recession.

Only Iceland and Ireland, which have suffered heavily in the downturn, are likely to have seen a bigger increase in debt than Britain between 2007 and 2010.

The report came as experts from Ernst & Young’s Item club said that the immediate prospects for the economy were “dismal”, with it struggling to grow by more than 1 per cent this year.

The report found that the UK economy will remain stuck in the doldrums this year with an export-led recovery unlikely to emerge until 2011.

It also comes at the beginning of a key week for economic figures, with official statistics on the gross domestic product, employment and inflation due to be published.

Although gross domestic product increased by 0.4 per cent in the fourth quarter of 2009, economists have warned that the risk of a double dip recession remains.

The report from the independent IFS is a major embarrassment for Mr Brown, who was Chancellor for 10 years until 2007 when he succeeded Tony Blair as Prime Minister.

Carl Emmerson, the IFS’s deputy director, said few other Western countries “would look at us with any envy”.

The Conservatives said the report was a “damning verdict” that showed how the UK had been “left Britain badly prepared for the longest and deepest recession since the war”.

The Liberal Democrats said it showed that the public finances were in an “abysmal state”.

Britain is already struggling under a debt mountain. Official forecasts suggest national debt is set to double to £1.4 trillion in 2014/15 – or £23,000 for every person in the country.

The IFS praised Labour for sticking to tough spending plans in Government between 1997 and 2001. The party had already made a commitment to follow spending plans set out by the previous Tory Government.

However the IFS identified a damaging period of “fiscal drift” between 2001 and 2007 when debt mounted to pay for spending on public services.

It said Mr Brown’s refusal to match spending rises with tax increases after 2001 had meant the UK had been forced to borrow heavily, up to and through the recession.

While Britain’s spending was the second highest among developed countries in the 10 years to 2007, its tax increases were only fifth highest over the same period, it said.

The result was that on the eve of the financial crisis in 2007 the UK was left “with one of the largest structural budget deficits in the developed world”.

The IFS said: “Mr Brown is fond of reminding us that this has been a global financial crisis. However the UK … has experienced a worse deterioration in its fiscal position than many other industrialised countries.”

Part of the blame lay with the Government using “unduly optimistic” forecasts to justify not raising taxes, it said in the report, titled “The Public Finances 1997 to 2010”.

The IFS blamed “weak performance of tax revenues that was unanticipated by both the Treasury and most independent observers”.

There was also “excessive optimism in the Government’s fiscal projections, which the Government used to justify its decision not to raise taxes further”.

Philip Hammond, the shadow Chief Secretary to the Treasury, said the report showed that “the only time the public finances improved under Gordon Brown’s regime was during the first few years, when he was following Conservative spending plans.

“The subsequent years of ‘fiscal drift’ left Britain with one of the biggest structural budget deficits in the developed world.”

Vince Cable, the LibDems’ finance spokesman, said: “The reality is that the public finances are now in a pretty abysmal state and neither Labour nor the Conservatives have a remotely credible plan as to how they will tackle this problem.”

A Labour spokesman said: “The IFS confirm that in the decade ahead of the financial crisis, we got borrowing and debt down compared to levels we inherited from the last Tory Government – while still supporting investment.

“And while debt has risen due to the biggest global economic crisis in modern times, the extra support we’ve put into the economy is working.

“Recovery is beginning and we’ve seen far fewer businesses fail, fewer homes repossessed and lower unemployment than predicted.”

What Recovery?

(Guardian) – Alistair Darling’s insistence that the economy would still be stuck in recession without a leg-up from the Treasury was boosted today by news that public spending and the car scrappage scheme had been essential to generating a recovery in the final quarter of 2009.

While GDP growth at the end of last year was a better than expected 0.4%, according to the Office for National Statistics – up from its previous estimate of 0.3% – analysts said the detailed new figures revealed that taxpayers’ support had been critical in generating the first quarter of expansion since spring 2008.

"The two sources of growth were government consumption, which will come under pressure after the election, and the household sector," said Danny Gabay, of the City consultancy Fathom. And while household spending expanded by a healthy looking 0.4% in the fourth quarter, much of that appeared to be due to the car scrappage scheme, which is about to end. When spending on transport was excluded, Gabay pointed out, household spending did not grow at all.

Graham Turner, of GFC Economics, said: "The breakdown of the GDP numbers highlights the precarious nature of the UK recovery, with many areas of consumer spending still under pressure, and the economy critically dependent on government support."

At last week’s budget, and in his televised debate with his Conservative and Liberal Democrat shadows George Osborne and Vince Cable on Monday night, the chancellor tried to make the government’s role in securing the fledgling recovery a sharp dividing line with the other parties, and today’s data lent support to that view.

However, although the fourth quarter showed stronger growth than first thought, the ONS painted a picture of an economy that remained dangerously fragile, and at risk of a "double dip" – a return to contraction – in the first quarter of 2010. That news would come in late April, deep into an election campaign, shattering Darling’s claim that the worst is over.

The shadow business secretary, Ken Clarke, seized on the news that despite hopes of an export-led bounce in the economy, the trade deficit actually worsened in the final quarter.

"The economic recovery will have to come from exports. But Britain’s trade gap has widened to £21bn, despite a weak sterling," he said. "We need a more balanced economy based on investment and exports to ensure sustainable growth."

Labour’s election strategists will also have been alarmed that workers’ pay declined last year, by 0.5% — the first fall on record, underlining the heavy toll the crash has taken on the public’s finances, and raising doubts about the prospects of the "feel good factor" returning before voters go to the polls.

Many consumers responded by paying off some of their debts, and setting aside more money for a rainy day. The household savings ratio was 7% over the year as a whole – more than four times the 1.5% seen in 2008, when shoppers were still happily increasing their debts to pay for a home makeover or a holiday.

There was also evidence of the considerable impact of the Bank of England’s unprecedented rate cuts in helping consumers to offset the fall in their incomes. In total, interest payments by households fell by £26bn over the year; though that was partly offset by an £18bn decline in the interest received by savers on their deposits.

Scale Of Spending Cuts Laid Bare In TV Debate

(Telegraph) – THE TRUE SCALE of the public spending pain that awaits whichever party wins the election was laid bare by the unanimous verdict of the Chancellor and his Conservative and Liberal Democrat counterparts in a live television debate.

During the debate on Channel 4 Alistair Darling, George Osborne and Vince Cable were asked how deep cuts will need to be to restore Britain’s economic credibility. They all agreed that the cuts would have to be tougher than those imposed by Baroness Thatcher in the 1980s.

The discussion was a curtain-raiser for the party leaders’ ground-breaking television debates that will take place once the election is called.

The Chancellor last week surprised other Labour figures when he allowed himself to make the comparison with the Conservative government of the 1980s.

All three men are likely to be privately happy with their performance but no one managed to land a knockout blow.

There had been concerns from some in Tory ranks that Mr Osborne would struggle to make an impact, but in the 50 minute debate he stood his ground on the key economic issues and made Mr Darling shift uneasily over Labour’s plans for a death tax.

Mr Cable, who claimed he was the only politician of the three to have experience of industry and the only one to have warned of the impending crash, was able to tap into the audience’s apparent distrust of the other two parties. He was applauded and got one of the very rare laughs from the Channel 4 audience.

Mr Osborne had to withstand what appeared at times to be an attempt by Mr Darling and Mr Cable to gang-up on him. Mr Cable, who got more applause from the studio audience than his two counterparts from the main parties, got very personal in his final comments.

The Liberal Democrat treasury spokesman warned that Mr Osborne and his party wanted “another chance to get their noses in the trough and reward their rich friends.”

He added that the Conservatives has “wasted” the revenues from North Sea gas and had “presided over two recessions.”

But Mr Osborne kept his cool and made a direct appeal to voters saying they would be able to make the choice between change or more of the same after 13 years of Labour failure.

He said: “They [Labour] took one of the strongest countries in Europe and we are now one of the weakest.”

And he hit back at Mr Cable, by pointing out that the choice was Conservative or Labour because “there is not going to be a Liberal Democrat government.”

The shadow chancellor has been under pressure in recent weeks to show that he can articulate the true scale of the problems facing the country and translate it into vote winning rhetoric. He repeatedly referred to how it was the “audience’s money” and “the people at home” who were paying for Labour mismanagement of the economy.

But the debate was also characterised by a number of areas on which the three parties seemed in agreement. They included the new 50p tax rate for top earners, reform of public sector pensions the need to keep options open on future VAT increases.

Mr Darling attempted to seize on Mr Osborne’s decision yesterday to say that Whitehall cost savings would be used to reverse part of Labour’s planned National Insurance rise.

The Chancellor said Mr Osborne was taking an “irresponsible risk” and accused him of showing “poor, poor judgement.”

In the immediate aftermath of the debate Ladbrokes cut the odds on the Conservatives winning a majority from 4-6 to 8-13.

But in a sign that Mr Cable was probably the winner of the debate his odds on delivering the next Budget – as a Chancellor in a coalition government – were cut from 16-1 to 12-1.

David Williams of Ladbrokes said: “Vince put in the expected wily performance, but Osborne not falling down as some had predicted was a plus point for the Conservatives.”

Mr Cable also won the largest share of the Channel 4 viewers’ cote as the show came to a close. Mr Cable received 36 per cent of the vote, Mr Darling 32 per cent and Mr Osborne 31 per cent.

Labour Under Pressure As Europe Tells Britain: Cut Deficit Faster, Deeper

(Guardian) – LABOUR’S STRATEGY for controlling Britain’s spending was tonight under fresh challenge when it emerged that the European commission is preparing to demand tougher government action to rein in the UK’s record peacetime deficit. In findings which were seized upon by the Conservatives, Brussels warned that the current plans for repairing the black hole in the budget left by a deep and long recession needed to be more ambitious.

“A credible time frame for restoring public finances to a sustainable position requires additional fiscal tightening measures beyond those currently planned,” said a draft report, due to be approved by the commission , but leaked to the news agency Reuters. It added: “The overall conclusion is that the fiscal strategy in the convergence programme is not sufficiently ambitious and needs to be significantly reinforced.”

The findings are likely to stoke what has become the pivotal political row between the two main parties ahead of next week’s budget, and the general election campaign that will follow.

They will add to pressure on the prime minister at a time when Labour’s new-year resurgence appears to have stalled. An ICM poll for the Guardian tomorrow shows the gap between the parties has increased, to a nine-point Conservative lead over Labour. It also suggests that Brown’s personal unpopularity with the electorate remains a drag on the party’s standing, even though the Tories have been beset by their own problems in recent weeks.

The European commission is set to warn that on current plans the UK will not meet the 2014-15 deadline for reducing the budget deficit to below 3% of national output. Chancellor Alistair Darling’s proposals envisage the gap between spending and taxes being reduced to 4.7% of gross domestic product, but the commission said even this target might be missed as a result of weaker growth than the Treasury is expecting.

The assessment provided some support for Darling ahead of next week’s budget, when it said the plans for the coming fiscal year were adequate, but the findings will increase speculation in the markets that the election will be quickly followed by fresh measures to cut spending and raise taxes, whatever the result.

The shadow chancellor, George Osborne, claimed the report was a heavy blow for the prime minister. “The Conservatives have been arguing that we need to reduce our record budget deficit more quickly to support the recovery. Our argument is backed by credit rating agencies, business leaders, international investors and now the European commission. That is why we need a change of government to restore confidence in our economy at home and abroad.”

A Treasury spokesman said the government was committed to halving the deficit over four years and that such a cut would be the sharpest among the Group of Seven industrialised countries. “The chancellor has taken a judgment on the appropriate pace of adjustment in 2010-11 and beyond,” the spokesman said.

This takes into account “the uncertainty around prospects for the public finances given the exceptional nature and strength of the global downturn, the need to support the economy through the early stages of the recovery, and the need to deliver sustainable public finances,” he said.

While tomorrow’s poll will be dispiriting for Labour, it is also clear that voters are not convinced by the Conservatives.

The survey shows only 18% think Britain would be best served by a strong Labour win. And though almost a third think a clear Conservative victory would be best, 44% want a hung parliament in which the government works with smaller parties such as the Liberal Democrats.

The Tory leader is 11 points ahead of Gordon Brown as the man voters want to win, and 20 points ahead as the leader best campaigning for “the votes of people like you”. He has a 14-point lead as the most competent for prime minister, and an 11-point lead as the man most likely to lead Britain in the right direction.

The figures call into question recent excitement about a Labour fight back. The Tories, at 40%, are up three on the February Guardian poll, and up two on another more recent ICM poll last weekend. The Liberal Democrats are on 20%, unchanged since the last Guardian/ICM poll, while support for other parties is on 9%. Conservative support has been within three points of 40% in all ICM polls since October.

Brown is likely to try to stay on even if he loses power, but a close result could mean there might have to be another election this year. Questioned on BBC Radio 4’s Woman’s Hour, Brown said: “I will keep going. I will keep going because I want a majority.”

Asked whether he owed it to the Labour party to stand aside if he did not secure a majority, he said: “I think I owe it to people to continue and complete the work we’ve started of taking this country out of the most difficult global financial recession.”

ICM Research interviewed a random sample of 1,002 adults by telephone on 12-14 March 2010. Interviews were conducted across the country and the results have been weighted to the profile of all adults. ICM is a member of the British Polling Council and abides by its rules.

Pound Slumps Over Fears Of Election Stalemate

(Telegraph) – THE VALUE OF THE POUND fell sharply on Monday as financial markets took fright at the growing possibility of a hung parliament.

Sterling fell by almost 3 cents, ending the day below $1.50 for the first time in nearly a year amid fears that Britain will be left with a weak government unable to cut spending and balance the budget.

Fears that no party would gain an overall Commons majority led to warnings that the pound was “staring into the abyss” and would fall further still. Figures suggest that traders are placing huge bets on more declines.

The markets’ growing fears about Britain’s economic prospects follow a slide in the Conservatives’ opinion poll lead over Labour. Recent surveys have put the Tory lead as low as two percentage points.

An Ipsos MORI poll last week suggested that Labour could cling on as the biggest party in the Commons.

Within minutes of London trading starting on Monday, the pound’s value began to slide.

At one point, it fell as low as $1.4781, the lowest level since May 1 last year. It rose slightly to finish at $1.4939 at 4pm — a fall of 2.85 cents. The slide also showed in the euro, which was worth 90.22p. Traders are unlikely to be reassured by a ComRes/Independent poll today that puts the Tory lead at five points, suggesting Labour would still have the most MPs but fall short of a majority.

Audrey Childe-Freeman, of Brown Brothers Harriman, a New York bank, said: “The risk of a hung parliament is increasing. You will need a government with a strong majority to push ahead with reforms that the UK needs.”

Simon Derrick, a currency strategist at Bank of New York Mellon, said: “The likelihood that we’re going to move to a rapid lessening of the deficit is being taken away.”

Mark O’Sullivan, of Currencies Direct, said: “As the pound drops, the currency markets appear to have run out of patience. Sterling could be staring over the edge of the abyss.”

Some investors fear that a hung parliament and a minority government would lead international credit ratings agencies to downgrade Britain’s status, making it more expensive to raise funds. A weak pound also drives up the cost of imports.

One international bank, Bank of Tokyo-Mitsubishi, predicted the pound would fall towards $1.40 this year.

A bank spokesman, Lee Hardman, said in a report that the worst outcome for the pound would be Labour clinging to power as a minority government because of the party’s high-spending agenda.

He wrote: “A Labour victory would further damage the fiscal credibility of the UK given their reputation for loose fiscal policy.”

Some currency traders also believe that the pound will come under greater threat if Greece’s crisis-stricken government is bailed out by other European Union members.

If Greece is rescued, some investors believe Britain is the European economy most exposed to market concerns about government deficits.

Gordon Brown angrily disputes comparisons between the UK and Greece, but independent analysts point out that the UK budget deficit this year is forecast to be 12.8 per cent of gross domestic product, comparable to Greece’s.

Downing Street and the Treasury refused to comment on the market movements. Privately, senior government officials have been contacting City banks to reassure them about plans to cut the deficit.

In a City speech last night, Lord Mandelson, the Business Secretary, accepted that Britain was “now unavoidably in significant debt”. But he said Labour was right to put off spending cuts until next year.

The Tories declined to comment. But the party has warned that the City will react badly unless they gain a substantial majority.

As the pound falls, the interest rate on gilts, British government bonds, is rising. That will ultimately push up the interest rates for loans.

Data from the Bank of England also showed that foreign investors sold off the most British bonds for nine months in January. Foreign investors sold £1.5 billion of gilts more than they bought during January, the figures showed.

On Tuesday the Treasury will sell off a new tranche of gilts. Investors said the strength of demand for those bonds would be a key indicator of market confidence in Britain.

GDP Growth Revised Upwards

(Telegraph) – GORDON BROWN’S ELECTION PROSPECTS have been boosted after official figures showed that Britain’s economy expanded by more than expected in the final quarter of 2009.

The Office for National Statistics said that the UK’s gross domestic product – the broadest measure of overall economic performance – increased by 0.3pc in the final three months of 2009, rather than the 0.1pc expansion it had previously estimated. The revision was higher than most economists had expected, and supports suspicions in the City that the economy is in fact starting to bounce back from its deepest recession in living memory.

The expansion is nevertheless slightly lower than economists had anticipated before last month’s release of the first estimate for growth, which sparked fears that Britain could be subject to a double-dip back into recession this year. It will also spark suspicions in Whitehall that the Prime Minister may call a snap election on the back of the news – though most think the polls will be in May.

The ONS said the revision was largely due to a stronger performance from the services sector, which accounts for 75pc of UK economic output. It said the UK recorded the strongest growth in services output and household expenditure since the first quarter of 2008 – in other words since the recession began. It was also supported by a smaller-than-previously-thought decline in inventories, as companies slowed the rate at which they have been feeding off stockpiles.

The ONS added that the revision was largely due to a strong December performance – the figures for which were not available at the time of the first estimate of growth last month.

“Overall, the upward revision is welcome,” said Jonathan Loynes of Capital Economics. “But does not alter the picture of a very fragile recovery.”