LONDON – Britain’s Treasury chief unveiled another tough budget Wednesday despite weakness in the economy that raised fears of a third recession in a little more than four years.
Though he offered beer drinkers and car drivers a tax break — no doubt a popular move among some — and provided incentives for home-buyers and investments in infrastructure projects, George Osborne showed the Conservative-led government remains convinced that debt-reduction measures are the best way forward for Europe’s third-largest economy.
“We are slowly but surely fixing our country’s economic wrongs,” he said.
That’s not a view shared by all. After three years of austerity, the country is borrowing more than Osborne initially thought and growing far slower than anticipated.
Ed Miliband, leader of the Labour Party opposition, said the budget was “more of the same” from a government that has failed to revive the economy following its deepest recession since World War II and presided over the loss of the country’s triple A credit rating from Moody’s Investors Service.
“Today, the chancellor joined Twitter,” Miliband said. “He could have got it all in 140 characters: Growth down. Borrowing up. Families hit. And millionaires laughing all the way to the bank. Hashtag: downgraded chancellor.”
While insisting that his approach was the only way to tackle the economy’s problems head on, Osborne conceded that the forecasts from the independent Office for Budget Responsibility were more downbeat than the last set less than four months ago.
The growth forecast for this year, for example, was halved to just 0.6 per cent, providing Osborne with even less room to manoeuvr as a flat-lining economy keeps a lid on revenues and maintains the upward pressure on welfare spending. And though growth in 2014 is expected to triple to 1.8 per cent, down from the previous 2 per cent prediction, it’s still below the country’s long-run average and a fairly uncomfortable backdrop to the expected election the following year.
The economy shrank by 0.3 per cent in the last three months of 2012, and many analysts have predicted another contraction in the first quarter of 2013. That would put the U.K. back into a recession — technically defined as two consecutive quarters of economic contraction.
Osborne admitted that the recovery was taking “longer than anyone hoped,” and that problems in Europe were holding Britain back. The 17 European Union countries that use the euro account for around 40 per cent of British exports and many of them are in recession, some of them severe. The current crisis in Cyprus is hardly going to help inspire confidence in the eurozone.
“We are still very exposed to what happens on the continent,” said Osborne, who confirmed that British military and government personnel on the island would not lose out if a raid on deposits goes ahead.
Because growth has disappointed over the past few years, the government has struggled to get its public finances into shape. The budget office now estimates public debt will continue rising until 2016-17, peaking at 85.6 per cent of Britain’s annual gross domestic product. In its last forecast in December, it estimated debt would peak at 79.9 per cent in 2015-16.
Osborne did tinker a bit with the remit of the Bank of England — giving it the chance to employ forward-looking guidance for interest rate expectations, similar to the approach now taken at the U.S. Federal Reserve.
“But this is not as bold a change as many were probably hoping for,” said Vicky Redwood, chief U.K. economist at Capital Economics.
The central bank will have a new governor in the summer when current Bank of Canada chief Mark Carney takes the helm. Many expect further changes to the Bank of England’s remit then.
Osborne said that some government departments will be ordered to free up money and that 3 billion pounds would be diverted to infrastructure projects. The Conservatives’ coalition partners, the Liberal Democrats, have been pushing for more projects funded by borrowing in the hope of supporting economic growth.
Just hours before the key speech, figures showed unemployment increasing by 7,000 between November and January to 2.52 million. The increase was caused by more 18-24 year olds becoming unemployed. Despite the rise, the rate remained at 7.8 per cent, compared with 8.3 per cent a year ago.
The Trade Union Conference, an umbrella organization for unions with 6.2 million members, said the increase in capital spending that is expected to be presented in the budget isn’t enough to kick-start the economy, boosting growth by just 0.06 per cent.
Underlining the gravity of the day, Osborne made his first venture into Twitter, choosing to take his message directly to voters. He also posted a picture of himself signing papers beside the scarlet briefcase that symbolizes budget day in Britain.
By early afternoon, he had registered two Tweets — but had some 28,000 followers. Unfortunately for Osborne, he also found himself bombarded by disparaging comments.