By Kevin Sullivan
Washington Post Foreign Service
Tuesday, November 25, 2008
LONDON, Nov. 24 -- British officials announced a $30 billion economic stimulus package Monday that they said was needed to jump-start the British economy in the face of a looming recession. Opposition politicians, however, called it an "unexploded tax bombshell."
Citing "economic uncertainty not seen for generations," Alistair Darling, the chancellor of the exchequer, or finance minister, outlined measures he said would offer financial relief to most Britons by cutting the sales tax from 17.5 percent to 15 percent while increasing the top marginal tax rate -- from 40 percent to 45 percent -- for the country's richest 1 percent.
Darling, in his annual pre-budget address to the House of Commons, said the government also planned to dramatically increase borrowing to fund massive public spending on hospitals, schools, transportation and environmental projects.
In a morning speech to business leaders, Prime Minister Gordon Brown cast his stimulus package in language that evoked the Great Depression.
"We now have a unique opportunity to do, in a 21st-century way, what was done in the 20th century by the New Deal," Brown said. "As they built roads and bridges to create the infrastructure for the years ahead, we can use this period of adjustment to build both the technological base and human capital to equip us for the opportunities ahead."
Darling said the measures -- including $4.5 billion for highways, housing and schools -- were needed because Britain had entered a recession that he forecast would last for at least a year. He predicted that Britain's economy would shrink by 0.75 percent to 1.25 percent next year before rebounding into positive growth by 2010.
"Because of the wide-ranging measures I am announcing today and the many strengths of the British economy, I am confident that the slowdown will be shallower and shorter than would have been the case," Darling told lawmakers amid fears of deflation, rising unemployment, a jump in house repossessions and other fallout here from the global economic crisis.
Opposition leaders immediately attacked the government's plans as reckless and misguided, especially its intention to fund an aggressive spending program by increasing its overall borrowing to $117 billion this year and $177 billion, or 8 percent of gross domestic product, next year.
"The chancellor has just announced the largest amount of borrowing ever undertaken by a British government in the entire history of this country," George Osborne, the Conservative Party's chief spokesman on economic issues, told lawmakers in response to Darling's report. "To pay for it he has placed a huge unexploded tax bombshell timed to go off underneath the future economic recovery."
Brown and Darling defended their borrowing and spending plans as forward-thinking and said they expected borrowing to be back to current levels by 2015.
"We have seen in previous recessions how a failure to take action at the start of the downturn has increased both the length and depth of the recession," Brown said. "To fail to act now would be not only a failure of economic policy but a failure of leadership."
The sales tax cut will take effect next Monday and last through 2009. It will be offset by an increase in duty on alcohol, tobacco and gasoline. The increase in tax on the wealthiest individuals will not come into force until April 2011, after the next national elections, which must be held by May 2010.
"This budget is all about the political cycle and not the economic cycle," Osborne said.
The measures drew wide applause from business and labor leaders, although many said they would not go far enough.
Willem Buiter, a professor of European political economy at the London School of Economics, said the package was neither as good nor as bad as it was portrayed Monday in the House of Commons.
"This is a very modest package," he said. "It doesn't hurt, but it won't help much."
Buiter said the sales tax cut was "very easy to do" and "as good as a check in the mail" for consumers that would encourage spending.
But, he added, "it won't stop the country from going into recession."