U.K. Budget Maps Growth, Not Cuts

By Kevin Sullivan
Washington Post Foreign Service
Thursday, April 23, 2009

LONDON, April 22 -- The British government, vowing to spend its way out of the deepening economic crisis, unveiled a budget Wednesday that will increase government borrowing to a record $255 billion this year and impose a 50 percent tax rate on Britain's highest earners.

"You can grow your way out of recession. You cannot cut your way out. We have made our choice," Alistair Darling, Britain's chancellor of the exchequer, or finance minister, said in presenting the budget to Parliament.

In addition to its crucial implications for Britain's faltering economy, the huge spending plan's success or failure could also determine the fate of Prime Minister Gordon Brown in national elections that must be held by May 2010.

Darling's budget calls for more than $1 trillion in borrowing over the next five years, which he said would increase Britain's public debt to 79 percent of national gross domestic product by 2013, levels not seen since World War II.

The budget has to be approved by the House of Commons. But because Labor holds a majority there, it will almost certainly pass without significant changes.

While the unprecedented scale of the borrowing and debt left Brown's political opponents sputtering, Darling told Parliament that the spending package reflected "our core values of fairness and opportunity -- and our determination to invest and grow our way out of recession."

Darling projected the economy to shrink by 3.5 percent in 2009. And, to skeptical jeers from opponents in the ornate House of Commons chamber, he predicted that the British economy would begin to turn around by the end of this year, grow by 1.25 percent in 2010 and expand by 3.5 percent in 2011.

Brown has bet his political future on his economic experience and leadership on the crisis, at home and internationally. He is a strong proponent of robust government fiscal stimulus, fueled by borrowing, to combat the global economic crisis, despite opposition from the Conservative Party.

Political opponents responded ferociously to the budget, saying it proved Britain's recession is deeper than Brown and his Labor Party had previously admitted and accusing Brown of mismanaging the economy as premier and helping to create the financial crisis in his decade as chancellor.

"They have condemned us to years of unemployment and decades of debt," said Liberal Democrat leader Nick Clegg, noting that Brown's spending plan does not project balancing Britain's budget until 2018.

Conservative leader David Cameron, who is likely to become prime minister if his party defeats Labor in the elections, drew a parallel with Labor's leadership during the 1970s and the famous "winter of discontent" in 1978-79, when workers' strikes crippled the nation.

"The last Labor government gave us the winter of discontent. This Labor government has given us the decade of debt," Cameron said. "The last Labor government left the dead unburied. This one leaves the debt unpaid."

Brown's 50 percent tax on the top 1 percent of British earners -- those making more than 150,000 pounds ($218,000) a year -- was a surprise. Darling had announced in November that the rate would rise from 40 percent to 45 percent. The 50 percent rate also comes into effect in 2010, a year earlier than Darling had earlier suggested.

Several financial industry analysts said the proposed tax increases could lead some financiers to flee Britain for more tax-friendly locations, further straining the financial industry.

Darling's tax increases ranged from the boardroom to the pub, including an immediate 2 percent tax increase on alcohol and cigarettes. He also announced a 2 percent increase in the gasoline tax, which is already among the world's highest.

In addition, Darling unveiled a $3 billion plan to help unemployed youth. He promised that anyone younger than 25 who had been out of work for at least a year would get a job, or at least job training, from the government.

"The alternative is a return to the days when a whole generation of young people found themselves abandoned to a future on the scrapheap," Darling said. "We will not repeat that mistake."

Darling announced more than $3.4 billion in environmentally friendly projects.

And he announced a plan in which people would get a $3,500 credit toward a new car if they traded in a vehicle that was at least 10 years old. That measure is designed to help the British auto industry as well as to remove old, polluting cars from the roads.

Despite the array of spending cuts, tax incentives for businesses and home buyers, and other programs in the budget, most analysts seemed skeptical of Darling's suggestions that economic recovery could begin this year.

Britain has "been living beyond its means. . . . This is a reality check," said Simon Clark, a senior lecturer in economics at the University of Edinburgh. "The Brown economy project is a broken model. And what's desperately sad is, it will take Britain a decade to get out if it."

Special correspondent Karla Adam contributed to this report.

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