August 7, 2020

Britain to Stick With Austerity Budget

In his annual budget presentation to Parliament, George Osborne, the chancellor of the Exchequer, stuck to the austerity plan he designed three years ago but offered some additional support for the ailing economy, including concessions for home buyers. Some economists said that relying in part on the housing market to spur growth reeked of desperation and showed how little room to maneuver the government has as it pushed ahead with austerity.

Mr. Osborne blamed troubles in the euro zone for a deteriorating economic outlook at home. He cited figures from the Office for Budget Responsibility showing that the British economy would grow 0.6 percent this year, half of the 1.2 percent forecast earlier. Growth will be 1.8 percent next year, down from a previous estimate of 2 percent, the office said.

“It is taking longer than anyone hoped, but we must hold to the right track,” Mr. Osborne told Parliament. “I will be straight with the country: another bout of economic storms in the euro zone would hit Britain’s economic fortunes hard again.”

In the latest sign that the government is struggling to repair the economy, Mr. Osborne conceded that public-sector net debt as a percentage of gross domestic product would start falling only in the fiscal year ending in 2018. That is a year later than Mr. Osborne predicted in December, when he pushed the goal back to 2017 from 2016.

The Office of Budget Responsibility said public-sector net debt would peak at 85.6 percent in the 2017 fiscal year, compared with the 79.9 percent it forecast in December.

Austerity measures at home, the economic crisis on the Continent and higher prices for energy caused the British economy to contract in the last three months of 2012. Without growth, Mr. Osborne cannot balance the budget, but a sluggish economy and rising consumer prices have been squeezing households, and companies are struggling with weak consumer demand.

Dominic White, an economist at Absolute Strategy Research and a former adviser to the British Treasury, said Mr. Osborne was unlikely to step back from his austerity plan two years ahead of a planned general election.

“George Osborne has imposed this debt target on himself, and to abandon it now would be political suicide,” Mr. White said. “Fiscal tightening has acted as a drag on growth and probably more than what the government thought when it set out.”

The Conservative Party of Mr. Osborne and Prime Minister David Cameron has been losing some public support. A survey by Ipsos MORI this month showed that 60 percent of the public was now dissatisfied with Mr. Osborne as chancellor.

With little cash to spend to help spur growth, Mr. Osborne is now relying on the Bank of England and the housing market to help create the economic upturn he needs to meet his debt targets.

In the new budget, he diverted some of the proceeds of a concerted public spending squeeze to extend the scope of a program that lends home buyers a portion of the money needed to put down a deposit on newly built houses.

The government will also set up a separate three-year program, operating along similar lines, to assist anyone wanting to buy a home worth up to £600,000, or $906,000. The program will be backed by up to £12 billion in government guarantees.

The housing market has traditionally been an engine of economic growth in Britain, but because of the country’s history of real estate booms and busts, even supporters of the plan acknowledged that it carried risks.

“It’s a bold move, perhaps a desperate one, but one that will be undeniably welcome by the beleaguered construction industry,” said Richard Threlfall, head of infrastructure, building and construction for the advisory firm KPMG. “The government has finally recognized that housing might offer the fastest-acting pain relief for our economic woes.”

The Royal Institution of Chartered Surveyors, the trade group for the real estate and construction industries, warned in a statement that even though the move “will help prevent prolonged market stagnation” it is also risky. The “government needs to be careful this doesn’t create another housing bubble,” it said.

If the plan stokes inflation, a new remit for the Bank of England, also announced Wednesday, would allow the central bank more flexibility in keeping its benchmark interest rates at their record low of 0.5 percent. Under its new remit, the Bank of England is supposed to focus more on helping economic growth than bringing inflation down to its 2 percent target.

Other efforts to generate growth include a reduction in corporate tax to 20 percent from 21 percent in 2015, a reduction in payroll taxes to help small and midsize businesses, and higher tax-free allowances for earners. A planned increase in the tax on fuel was scrapped and a duty on beer was reduced.

Mr. Osborne also announced tax concessions designed to spur the exploitation of shale gas reserves in Britain.

But his plan was criticized by the Labour Party, in the opposition, which argued that the relatively small shifts in tax and spending policy would not be enough to help the economy return to growth.

Ed Miliband, the Labour leader, said Wednesday in Parliament that Mr. Osborne was “the wrong man in the wrong place at the worst possible time for this country.”

“All he offers is more of the same,” Mr. Miliband said. “Britain deserves better than this.”

The Labour Party has argued that the government should increase spending to help the economy, even if it means borrowing more in the short term. But Mr. Osborne and Mr. Cameron have argued that this would unnerve investors in British debt.

Article source: http://www.nytimes.com/2013/03/21/business/global/britain-to-stick-with-austerity-budget.html?partner=rss&emc=rss

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