UK wields £11bn axe on public spending

Austerity measures to reduce record deficit fuel fear of rampant unemployment, stagnant economy and hindrance to vital services.

LONDON // George Osborne, Britain's chancellor of the exchequer, took the axe to public spending yesterday, cutting billions in the new coalition government's emergency budget. Seven weeks after taking office, Mr Osborne announced that he was also increasing the government's VAT sales tax to 20 per cent from January and ordered all civil service departments, except for health and overseas aid, to cut spending by 25 per cent over the next four years - a move that the unions predicted would cost 750,000 jobs.

Rejecting warnings from Labour Party politicians that cutting too far could irreparably damage the fragile economic recovery, Mr Osborne announced a plan to cut £11 billion (Dh59.8bn) from welfare spending over the next five years. Child benefits will be frozen for three years, families earning more than £40,000 will see their tax credits cut, housing benefits will be capped and everyone claiming disability will have to undergo strict new medicals from 2013.

One measure that could affect British expatriates is a decision to raise capital gains tax, paid on sales of shares or second homes, from 18 per cent to 28 per cent for higher-rate taxpayers. Additionally, there will be a two-year pay freeze for millions of public sector workers and an acceleration in the move to increase the state pension age from 65 to 66. Harriet Harman, acting as the Labour leader since Gordon Brown's resignation after his party's election defeat last month, said the budget would "throw people out of work, hold back economic growth and harm vital public services".

The chancellor in the Conservative-Liberal Democrat government conceded that growth would be affected and the Office for Budget Responsibility subsequently reduced its forecast slightly for both this year and next. Promising to wipe out the UK's record deficit by 2016, Mr Osborne accepted that the budget was a painful one, but added: "The years of debt and spending make this unavoidable. Yes, it is tough, but it is fair."

During a 57-minute speech to the House of Commons yesterday, he said Britain faced an emergency, as it had inherited from Labour a budget deficit larger than any country in Europe with the exception of Ireland. "One pound in every four we spend is being borrowed. What we have not inherited from our predecessor is a credible plan to reduce their record deficit," Mr Osborne claimed. He said that everyone would be asked to contribute during this period of austerity, but added: "In return we make this commitment: everyone will share in the rewards when we succeed."

However, Ms Harman, who was roundly heckled by backbench MPs on the government benches, said the budget represented "the same old Tories, hitting hardest those who can least afford it". In a blatant attempt to drive a wedge between the coalition partners in the new government, she said that while the budget was "true to form" for the Conservatives, it "includes things that the Liberal Democrats have always fought against - surely they cannot vote for this".

One of the measures she was undoubtedly alluding to was the rise, from 17.5 to 20 per cent in VAT - something the Lib-Dems had vociferously campaigned against before the election. Mr Osborne justified the increase by saying it would raise an extra £13 billion a year. Nick Clegg, the Liberal Democrat leader and deputy prime minister, has tried to stem any rebellion within his own ranks by telling party workers that the leadership had fully signed up to the budget strategy.

He rejected Ms Harman's accusations that he had sold out to the Conservatives and insisted that the budget bore "the stamp of our Liberal Democrat values". But Ms Harman added: "The chancellor says his top priority is to cut the deficit. In order to get the deficit down, you need to keep economic growth up and you need to keep unemployment down. "Today's budget is bad for growth and that will make it harder to cut the deficit."

The budget also did not go down well with union bosses. Derek Simpson, the joint general secretary of Unite, the country's largest union, described it as the biggest assault on essential services for a generation. "Today the mask slipped to reveal this government for what it is - Tory slashers of services and friends of the rich and powerful," he said. "Where is the promised fairness in cutting the wages of needy households yet fighting shy of closing the tax loopholes which allow the wealthy to dodge their duty to this country?"

There were a few sweeteners in the budget, however, including a plan to raise personal allowances for basic rate taxpayers, which would mean an extra 880,000 of the lowest paid not paying tax at all. Other measures included an expected "super-tax" on the banks, a 10 per cent rise in capital gains tax for the highest earners and a tax holiday for new businesses starting up outside south-east England.

Mr Osborne said that there would also be a two-year freeze on the taxes local councils could charge and a progressive reduction, from 28 to 24 per cent, in corporation tax. [e-mail]