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Darker growth outlook pushes UK austerity plan off track

posted 5 Dec 2012, 11:49 by Mpelembe Admin   [ updated 5 Dec 2012, 11:49 ]

British finance minister George Osborne tells parliament that he will break a key debt promise and warns that growth would be weaker than expected, in a bleak outlook announced in his Autumn budget statement, that could damage his party's hopes of winning a 2015 election.

LONDON, ENGLAND, UNITED KINGDOM (DECEMBER 5, 2012)(UK POOL) -  Britain will endure more austerity and break a central debt-cutting promise to cope with weaker

growth, the government said on Wednesday (December 5), in a bleak outlook that will do nothing to improve Prime Minister David Cameron's re-election chances.

Chancellor (Finance minister) George Osborne announced real-term welfare cuts and said tax rises and spending cuts will drag on for another year into 2017/18 as Britain is held back by the euro zone debt crisis and a global slowdown.

"People know there are no quick fix to these problems. But they want to know that we are making progress and the message from today's Autumn Statement is that we are making progress. It is a hard road but we are getting there. Britain is on the right track and turning back now would be a disaster," Osborne told parliament to jeers and roars of disapproval from opposition politicians.

In a half-yearly budget update to parliament, Osborne said weak growth meant he would be a year late in meeting a self-imposed target of seeing debt fall as a share of Britain's national income by 2015/16.

But the Chancellor insisted that more borrowing would be disastrous:

"Confronted with this news some say we should abandon our deficit plan and try to borrow more. They think by borrowing more we can borrow less; that would risk higher interest rates, more debt interest payments and a complete loss of Britain's fiscal credibility. We are not taking that road to ruin," Osborne told a packed House of Commons chamber.

Despite the Chancellor's assurances that "the British economy is healing after the biggest financial crash of our lifetimes," missing that goal is an embarrassment for Osborne, who has staked his reputation on wiping out Britain's deficit and cutting public debt. It also raises questions about the safety of Britain's coveted triple-A credit rating.

The opposition Labour Party -- which leads Cameron's Conservatives by around 10 points in the polls, 2-1/2 years before a 2015 election -- said the austerity drive had failed and was holding back Britain's recovery.

Opposition Shadow Chancellor, Ed Balls told the Commons:

"the Chancellor's fiscal strategy has been completely derailed," and that "the one test they [the Coalition] set themselves to balance the books and get the debt falling by 2015 is now in tatters."

The government made dealing with Britain's budget deficit -- which hit a record 11.2 percent of GDP before the 2010 election -- its biggest priority when it came to power. The economy was now forecast to grow by only 1.2 percent in 2013, well down from the 2 percent predicted in March, Osborne said, citing figures from the independent Office for Budget Responsibility.

The government's fiscal watchdog expected the economy to shrink by 0.1 percent in 2012, compared to a prediction of 0.8 growth in March, and grow by 2 percent in 2014, compared to the 2.7 percent previously forecast.

Under pressure to do more to restore growth, Osborne said he would cut the main rate of corporation tax by a further 1 percent. It will stand at 21 percent from April 2014.

The announcement will be welcomed by British businesses like Alexander Dennis. The firm is western Europe's fastest growing bus and coach manufacturer, and is bucking the tough trading environment by selling to Hong Kong, New Zealand and North America. The company's Chief Executive Officer (CEO) Colin Robertson said the government must do everything possible to help firms grow.

"Any tax breaks, or any incentives to help invest further in technology development, bringing on new graduate trainees, you know really helping fund our technology-led universities to really accelerate the best and brightest talent I would really sign up for every day," Robertson told Reuters TV at the company's Guildford plant.

The government's watchdog said 1.1 million public sector jobs would be lost by 2018 because of further spending cuts in 2017-18. The Trades Union Congress said Osborne had offered "pain without purpose."