Salar posted on November 25, 2008 00:18
Treasury Chief Alistair Darling will have to strike a delicate balance Monday when he presents his spending plans. With the economy in deep trouble and people looking to the government for help, his goal will be to offer a crowd-pleasing fiscal boost without prompting investors to run for the exits.
On the world stage, the U.K. has been among the most vocal proponents of relying on government spending to counter economic malaise. But with investors increasingly concerned about the government's ability to balance its budget, it will likely have to settle for a smaller stimulus than the multibillion-dollar packages announced by countries like the U.S., Spain and China.
Chancellor Alistair Darling has cut VAT from 17.5% to 15% for 13 months in his pre-Budget report - saying it would put about £12.5bn in consumers' pockets. But top rate tax will rise to 45% and all National Insurance contributions will go up 0.5% from 2011.
In his so-called prebudget report, Mr. Darling is likely to predict a sharp but short economic downturn and announce a stimulus package that will be valued at about 1% of annual economic output, people familiar with the matter say. The package is likely to include an extension of income-tax cuts for low-income families announced in May and the acceleration of billions of pounds of large spending projects, for transport in particular.
Prime Minister Gordon Brown also has promised new measures to help small businesses get loans. Efforts could include extending an existing £360 million ($531 million) initiative guaranteeing 75% of the loans of small businesses, among other measures.
"To fail to act now would be not only a failure of economic policy, but a failure of leadership," Mr. Brown plans to say in a speech to business leaders Monday, according to a transcript. Mr. Darling hopes to pay for the stimulus in part through sales of state assets and efficiency gains in government offices, a person familiar with the matter said.
And he said he was increasing duties on alcohol, tobacco and petrol so they would remain at the price they are now. Mr Darling said he wanted to soften the impact of a recession with Britain's economy set to shrink next year.
Mr Darling said the government would inject an extra £20bn into the economy, or 1% of GDP, funded in part by an extra £5bn in efficiency savings.He said it would be "perverse and damaging" to stick to government borrowing rules in the current crisis so they would be temporarily suspended - but he said the books would be balanced again by 2015/16.
Underscoring the U.K.'s financial challenges, the Treasury said Thursday that the budget deficit more than doubled to £23.3 billion in the seven months ended October, from £9.5 billion in the corresponding period last year. Economists predict the budget deficit will reach 6.5% of annual economic output next year -- one of the widest deficits among developed nations.
In a measure of how international investors have lost confidence in the U.K., the pound has fallen by about 25% against the dollar this year and almost 14% against the euro.
He said government borrowing would more than double to £78bn this year and £118bn next year, before starting to come down.
"If we did nothing we would have a deeper and longer recession that would cost the country more in the long term," Mr Darling told MPs.
"In these extraordinary circumstances allowing borrowing to rise decision for the economy."
t was a global crisis but the World Bank and other institutions were confident that the global economy would recover strongly, doubling in size over the next two decades, added the chancellor. Mr Darling wants to get consumers spending again and save businesses from going under - but he must borrow record sums to pay for it.
He is expected to outline how that money could be paid back in future years through a combination of slowing growth in government spending and tax increases. The 45% top rate will not come into effect until after the next general election, meaning Labour will not break its 2005 manifesto commitment on raising income tax.
The cut in VAT comes into effect on Monday in time for Christmas shopping.