Britain becomes latest to slash budget, freeze salaries

By Rebecca Omonira-Oyekanmi
Wednesday, June 23, 2010

LONDON -- Britain announced a far-reaching deficit-reduction plan Tuesday aimed at saving billions of dollars over the next five years, becoming the latest European nation to slash spending amid increased worries about rising public-sector debt.

The move comes despite a plea last week from President Obama for the Group of 20 governments to hold back on fiscal tightening until the global economic recovery strengthens. Leaders from the G-20 are scheduled to meet in Toronto this weekend, and the talks are expected to highlight growing differences between the United States and Europe over the timing of budget cuts.

In a letter to G-20 members on Friday, Obama urged them to avoid "consequential mistakes of the past when stimulus was too quickly withdrawn."

Nevertheless, Britain's new coalition of Conservatives and Liberal Democrats went ahead Tuesday with an emergency budget containing a package of spending cuts and tax increases that will be worth $188 billion a year by 2015-16. George Osborne, Britain's finance minister, said that of those savings, about $145 billion will come from cuts to public-sector spending and almost $43 billion will come from tax increases.

The ax will fall on various social welfare benefits, including a controversial three-year freeze on child benefits, a cap on housing benefits and means testing for disability allowances.

Britain also plans to raise its value-added tax, or VAT, from 17.5 percent to 20 percent, effective in January. The increase was included despite declarations by both the Conservatives and the Liberal Democrats during last month's election campaign that they opposed an increase in the sales tax.

Osborne also announced a two-year freeze on public-sector salaries above $31,000 a year. The pain for public servants is expected to worsen after a planned review of pensions in September. Most public-sector departments face an average 25 percent reduction in their budgets over the next five years.

Britain's decision to cut rather than spend follows a wave of austerity packages recently unveiled across Europe, including almost $100 billion worth of cuts in Germany and public-sector pension reforms in France.

Osborne tried Tuesday to offset the news of spending cuts and tax increases with an attack on banks.

"In putting in order the nation's finances, we must remember that this was a crisis that started in the banking sector," he said. "The failures of the banks imposed a huge cost on the rest of society. So I believe it is fair and it is right that in the future banks should make a more appropriate contribution, which reflects the many risks they generate."

Britain will impose a levy of 0.04 to 0.07 percent on the balance sheets of British banks and building societies, including those with operations overseas, starting in January. There will be exemptions for tier-one capital and insured retail deposits along with lower rates for loans held for the long term.

Osborne said he will work with the French and German governments to impose the tax, which he said was expected to raise more than $3 billion in annual revenue.

Germany announced a similar levy in March and plans to finalize draft legislation this summer. Details for a French bank tax will be revealed in the government's upcoming budget. In a joint statement Tuesday, the three governments said, "All three levies will aim to ensure that banks make a fair contribution to reflect the risks they pose to the financial system and wider economy, and to encourage banks to adjust their balance sheets to reduce this risk.

"The specific design of each may differ to reflect our different domestic circumstances and tax systems, but the level of the levy will take into consideration the need to ensure a level playing field."

The three countries said they plan to discuss the proposed levies with G-20 colleagues at the group's summit this weekend.

Omonira-Oyekanmi is a special correspondent.

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