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UK budget seeks to promote faltering growth

By JANE WARDELL
The Associated Press
Wednesday, March 23, 2011; 1:10 PM

LONDON -- The British government put business competitiveness at the center of its economic recovery plans in its annual budget on Wednesday, enticing foreign investment with a corporation tax cut as it acknowledged economic growth will be slower than anticipated this year.

On the home front, Treasury chief George Osborne attempted to sweeten the pill for Britons who are still reeling from the country's worst recession since World War II with a headline-grabbing cut in fuel duty.

With Britain still struggling to get back to firm growth after wallowing in recession longer than other major industrialized nations, the government hopes more foreign investment and more innovation from domestic businesses will help.

"Let it be heard clearly around the world ... that Britain is open for business," Osborne told lawmakers in the House of Commons as he tried to swing the spotlight from hugely unpopular government spending cuts on services from welfare to education. "We are only going to raise the living standards of families if we have an economy that can compete in the modern age."

Osborne detailed a raft of business-friendly measures that included a 2 percent trim to the corporate tax rate - double the cut previously announced - a yearlong extension to a tax break for small businesses and funding for 40,000 extra apprenticeship places.

Chris Sanger, global head of tax policy at Ernst & Young, said Osborne "handed out a veritable sweet shop of goodies to all but the banks and oil companies," which will instead be more greatly taxed to pay for the corporation tax cut, a voter-friendly 1 percent trim to fuel duty and an equity program for first-time home buyers.

"In delivering a budget that cut business tax, cut personal tax and cut business rates Osborne sent clear signals to the U.K. and the rest of the world that business is to be the motor for recovery," Sanger said.

Osborne needs all the growth drivers he can find after being forced to acknowledge that the Office for Budget Responsibility has downgraded its forecast for gross domestic product growth for 2011 to 1.7 percent, compared with the 2.1 percent it predicted in November. The reduction, which brings the forecast closer to a 1.5 percent prediction by the OECD, was made because of rising commodity prices, higher inflation and a shock 0.6 percent contraction in fourth-quarter GDP.

The Office for Budget Responsibility, created by Osborne last year to keep economic forecasts at arm's length from government, also sharply raised its inflation forecast to between 4 and 5 percent this year, from 3 percent previously. That leaves inflation at more than double the Bank of England's target of 2 percent, raising the specter of an imminent hike in interest rates from a current record low of 0.5 percent - increasing the pressure on average Britons facing rising unemployment alongside higher prices.

Ed Miliband, the leader of the main opposition Labour Party, said the growth forecasts revealed that the Conservative-led coalition had gone "too far, too fast" with its austerity program of harsh spending cuts aimed at bringing down the government's budget deficit.

Osborne has made it a priority to almost eliminate a deficit that currently stands at around 10 percent of GDP by the 2015 general election. He revealed Wednesday that government borrowing will come in at 146 billion pounds ($237 billion) this year, slightly under the government's target of 148.5 billion pounds, but will then fall less sharply in subsequent years than had been anticipated.

Monument Securities economist Marc Ostwald said the setback raised questions about how long it would be before the government gave up on fiscal consolidation, noting that "countries such as the USA pay little more than lip service to their similarly formidable tasks."

Despite the backtrack on economic growth, Osborne and Prime Minister David Cameron have claimed Wednesday's spending plan as a "budget for growth."

Osborne put much of the focus on attempts to encourage entrepreneurial activity and attract international business. He said Britain was aiming to be the most competitive tax system within the Group of 20 emerging and industrialized nations as well as the "best place in Europe to start, finance and grow a business."

An ongoing annual 1 percent trim to the corporation tax rate after this year's 2 percent cut will result in a corporate tax rate of 23 percent - 16 percentage points lower than the United States, 11 percent lower than France and 7 percent lower than Germany.

Osborne also flagged changes to the tax regime for wealthy non-domiciles and a potential abolition of the unpopular 50 pence tax rate for higher earners.

"The message to entrepreneurs and wealth creators is that the U.K. is once again seeking to be welcoming," said Julie Morrison, tax partner at Ernst & Young.

For ordinary Britons, Osborne said the 1 pence cut in fuel duty will take effect at gas stations around the country later Wednesday. That reversed a plan by Labour to raise the duty by 1 pence from next month.

"I know that by itself this will not end the pressure on family budgets," said Osborne. "But we've done what we can to help."

The measure is likely to win extra favor among Britons, who are facing rising unemployment and higher interest rates at a time of soaring crude oil prices, by being financed by higher taxes on oil and gas companies operating in the North Sea.

Osborne also said that profits from a levy on banks would fund a 250 million pound shared equity program for first time home buyers and announced that rise in airline passenger duty would be delayed for a year.

But these small giveaways may not entirely appease an electorate increasingly disgruntled about Osborne's plans, first outlined in October, to slash some 80 billion pounds ($128 billion) of public expenditure over five years.

Blaming overspending by the previous Labour government, Osborne has already lifted sales tax from 17.5 percent to 20 percent in a bid to raise an extra 13 billion pounds for the country's coffers this year. More painful measures are still to come, including spending cuts on services like welfare and a rise in the retirement age.

"Make no mistake, this is a class war budget with its roots deep in the playing fields of (elite school) Eton, designed to shift the balance even further towards big-business and the wealthy elite who finance the Conservative Party," said Bob Crow, leader of the RMT transport union. "The spivs who created this crisis are let off the hook and working people, and those who depend on public services, are lined up to take a kicking."

A handful of protesters blocked Osborne's car as he headed to Parliament carrying the famous red budget briefcase on Wednesday. The Trades Union Congress expects to attract at least 100,000 people at a public march on Saturday to protest the cuts, accusing the government of scaremongering by making comparisons with hard-hit Greece.

© 2011 The Associated Press