British budget tightens belts

Britain's embattled Labour government unveiled a budget Wednesday that took baby steps toward reining in spending while trying desperately to avoid harm to a burgeoning economic recovery.

Leading into an election widely expected to happen in May, Prime Minister Gordon Brown's governing Labour Party is trailing badly in opinion polls. But the country's dire economic situation did not allow the embattled party to use the time-honoured tradition of electorate-friendly giveaways to curry favour its pre-election budget..

"This will be a budget to secure the recovery, tackle borrowing and invest in our industrial future," Chancellor of the Exchequer Alistair Darling told Parliamentarians in his budget speech Wednesday.

"Having come through this global recession, this budget will set out a route for the country to long-term prosperity."

Britain's highly publicized bonus tax — a levy on any bonus payments in excess of $40,800 — has been far more lucrative than initially expected, Darling told the House of Commons, raising more than $3 billion so far. That's more than twice what was expected.

Like the governments of many developed economies, Britain stepped in to bail out and take ownership stakes in two of its largest banks last year, the Royal Bank of Scotland and Lloyds TSB.

As a result of those moves, the British government has already hauled in more than $12 billion this year in fees and charges in exchange for their support, Darling said Wednesday.

Darling took further aim at high income earners by announcing the removal of most tax exemptions for earnings in excess of $152,000. Earnings over $230,000 already face a tax of 50 per cent.

The government is also proceeding with previously planned tax hikes on gasoline, alcohol and cigarettes. Those are likely to be unpopular, as will an unexpected 10 per cent surcharge on cider consumed by British drinkers that will be in place as of Sunday.

As promised, the government did not move to raise or lower the national sales tax, currently set at 17.5 per cent.

Darling also announced the government plans to move one-third of civil servants in expensive London to other parts of the country. He didn't provide an estimate of how much that would lead to in savings, but added that the plan would be implemented over the next five years.

The British government is on track to post a $271-billion budget deficit this year. The figure represents 12.8 per cent of the nation's GDP. Borrowing in Greece, which has been rocked by a debt crisis and is in danger of defaulting on its loans, currently sits at 12.7 per cent of GDP.

Credit rating agencies have warned about Britain's fiscal position and the status of the country's "triple-A' sovereign debt rating, which allows the country to borrow relatively cheaply.

"With the U.K.'s budget deficit bearing comparison with that of Greece, the markets and credit rating agencies would severely punish any sort of pre-election splurge," said Deloitte economic adviser Roger Bootle.   

Darling said Wednesday the country's financial situation is showing signs of improvement.

'This will be a budget to secure the recovery.' —Alistair Darling

Borrowing is set to come in $16 billion less than forecast this year, at $254 billion. It's on track for similar drops in each of the next three years, Darling said. And the country is on pace to halve its debt-to-GDP ratio to roughly five per cent within four years. Total debt is on track to be roughly $160 billion lower than expected by then, he added.

Despite the belt-tightening, the budget document was not devoid of new spending. The government will pour another $3.8 billion into a one-time stimulus program aimed at small business, promoting innovation, and investing in national infrastructure and key skills.

"This package will be paid for by switching spending from within existing allocations and the extra proceeds from the tax on bank bonuses," Darling said.

Efforts to tackle unemployment

The budget also took aim at youth underemployment, as Darling unveiled a program that would ensure nobody under 24 would be unemployed for more than six months without being offered new training or work outside their profession.

The government also unveiled a new $3-billion fund for green technologies. The fund, aimed at carbon transport and alternative energy technologies, will be a 50/50 partnership between public and private funds.

The Opposition Conservatives were unimpressed with the measures Darling unveiled.

"Labour's workmanlike, defeatist, do-nothing attitude is the last thing we need today," Conservative Leader David Cameron said.

"It's not taking action that risks the recovery, it's inaction just sitting there and putting things off while our country slides into the danger zone of lower confidence and higher interest rates."

The recession shrunk the British economy by six per cent, Darling revealed on Wednesday. He stood by his forecast that the economy will expand by one to 1.5 per cent this year. But the prediction for next year was slightly downgraded to three to 3.5 per cent.