Britons brace for tough emergency budget

[June 22, 2010]  LONDON (AP) -- The British government is expected to cut spending, raise taxes on capital gains and give a break to the poorest taxpayers when it announces its emergency budget plans on Tuesday.

Treasury chief George Osborne will lay out the details in a crucial moment in the government's efforts to close a yawning gap between income and expenditure and allay fears over the country's debt load. The move, which echoes austerity efforts across Europe, flies in the face of U.S. calls to avoid slowing the global recovery with cuts.

Economists are predicting a possible extension to a one-year freeze on public sector pay, a purge of benefits and a likely rise in a tax on goods and services which now stands at 17.5 percent.

The budget is expected to include more detail on plans for a bank levy, and to deliver an election promise made by the Liberal Democrats -- the junior coalition partner -- to scrap income tax for the country's lowest earners.

"My budget is tough but it will be fair," Osborne said in a statement ahead of his budget speech in the House of Commons.

"This is an unavoidable budget because of the mess we have to clear up, so the coalition government will take responsibility for balancing Britain's books within five years. We are going to do it fairly, protecting children and pensioners, and ensure the richest contribute the most," he said.

The focus on tackling deficits risks putting Britain, like Europe, at odds with the U.S. at the Group of 20 summit in Canada this weekend. In a letter last week, President Barack Obama urged world leaders not to threaten the global recovery by trimming spending prematurely.

But like Germany, Spain and most other European nations, Britain is firmly focused on reassuring markets it can manage its debt and avoid the fate of Greece, which had to be bailed out.

Nigel Lawson, who served Margaret Thatcher as her Treasury chief from 1983 to 1989, said Osborne's economic plan was crucial to reverse the "mismanagement" of former Prime Minister Gordon Brown's government.

"This budget today is far and away the most important budget he will ever have to deliver," Lawson told GMTV television.

The Conservative-Liberal Democrat coalition has abandoned the previous government's pump-priming approach to emphasize spending cuts. Cameron's team talks about a mix of 80 percent spending cuts and 20 percent tax increases.

Osborne said it will be "business not government that will create the jobs of the future."

The previous Labour Party government under Gordon Brown pumped billions into keeping the economy afloat as Britain endure a deep 18-month recession.

Debt has risen above 900 billion pounds ($1.3 trillion), or 62 percent of gross domestic output; unemployment is 7.9 percent and inflation remains stubbornly high at 3.4 percent.

The new Office for Budget Responsibility earlier this month downgraded the economic forecast to 2.6 percent growth in 2011, compared to the 3.25 percent estimate the previous government offered in March.

The deficit is currently at 10.4 percent of GDP, and the European Union has warned that it is likely to rise to 12 percent this year. Debt is expected to reach 88 percent of GDP in 2011 or 2012, overtaking the EU average.

[Associated Press; By DAVID STRINGER]

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