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British government prepares to announce extensive spending cuts

posted 20 Oct 2010, 04:01 by Sam Mbale   [ updated 20 Oct 2010, 04:42 ]

British finance minister George Osborne is preparing to announce extensive public expenditure cuts, averaging 25 percent across all government departments.

LONDON, ENGLAND, UNITED KINGDOM (OCTOBER 20, 2010) ITN - Britain will take an axe to its welfare state on Wednesday (October 20) as part of an 80 billion-pound (125 billion U.S. dollars) cut in public spending that could seal the fate of both the economy and the coalition government.

After months of bitter negotiations, Conservative finance minister George Osborne will announce his spending review at 1130 GMT. Cuts of 25 percent on average are in store for most government departments outside priority areas.

Economists are split between those who say the drastic action is needed and those who argue it will tip Britain back into recession. Almost all agree, however, that growth will slow and the Bank of England will have to keep monetary policy super-loose for the foreseeable future.

Unions are already decrying the potential loss of close to a million public sector jobs but for now, few expect the kind of violent protests seen in other European capitals also launching austerity drives in the face of burgeoning budget deficits.

Osborne's goal is to bring down a record deficit of 11 percent of GDP -- the highest in the G7 -- to around 2 percent in five years, a fiscal tightening of some 113 billion pounds (178 billion USD), a quarter of which will come from tax rises.

No previous British government has tried anything as ambitious and the National Institute of Economic and Social Research think tank said on Wednesday it thought the government could only push through half the planned cuts.

So far, the government has announced an eight percent cut in the defence budget, less than expected and setting the scene for bigger cuts elsewhere. It has said it will protect health, schools and overseas aid budgets.

A government source told Reuters late on Tuesday the science budget would escape lightly and only be cut by 9 percent, as Osborne is determined to support areas that support long-term growth of the economy.

Another official said welfare spending would be very hard hit. Osborne has already pledged to reduce it by some 11 billion pounds (17.3 billion USD). Billions more are expected to be chopped on Wednesday.

The government is braced for an uproar. Officials point to the decision earlier this month to remove child benefits for higher earners, which has angered many traditional supporters, as a sign of the difficult choices it faces.

Still, the latest Reuters/Ipsos MORI political monitor on Tuesday showed 38 percent of people believe the centre-right Conservatives have the best economic policies compared to a quarter who preferred the opposition Labour Party's stance.

The Liberal Democrats, the junior coalition partners, have seen their support plummet in most polls.

Much will depend on how the economy copes with the fiscal tightening. For now, the consensus is that Britain will show slow growth for a couple of years as the private sector picks up the baton from a deflated public sector.

The latest Reuters poll of economists' forecasts is for GDP growth of 1.6 percent this year and 1.8 percent next year.

But some economists say growth could stall because of the cuts. Many business and consumer confidence measures are already waning even before the measures begin.