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British budget to focus on recovery

Mar 20 2011 12:11 AFP

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London - Britain's government unveils its annual budget Wednesday, expected to focus on nurturing economic growth in the face of deep spending cuts and tax hikes aimed at slashing the nation's huge deficit.

Finance minister George Osborne unveils his 2011/2012 tax and spend plans amid fears that his drastic belt-tightening measures could tip Britain back into recession.

Prime Minister David Cameron's Conservative-Liberal Democrat coalition, which rose to power in May 2010, has sought to slash a record public deficit that it inherited from the previous Labour administration.

Chancellor of the Exchequer Osborne wasted no time in delivering economic pain, via an emergency budget last year amid intense concern on global markets over sky-high levels of debt in the eurozone.

Although Britain is not a member of the eurozone, much of its trade is with members of the single bloc.

"Last year's emergency budget was a rescue mission, bringing us back from the brink of fiscal disaster and we will stick to the course that we have set out," Osborne said earlier this week.

"The mission of this year's budget will be to move from rescue to reform, because if we want Britain to succeed in the new global economy and we want to create the high-quality jobs of the future, then we need to overcome some of the deep-rooted and long-standing weaknesses of the British economy."

He added: "We have already made a strong start, with reform of education, welfare and energy; new investment in science; and setting out a clear path towards a more competitive tax system.

"Next week's budget will mark the next phase of our plan for growth. The foundation of that plan must be fiscal responsibility."

Ahead of the budget, Osborne was comforted by supportive data and praise from the Organisation for Economic Cooperation and Development (OECD) and Fitch Ratings over his swift action to slash state borrowing.

However, some economists remain sceptical over Osborne's ability to focus on growth in this week's budget.

"We would expect that the budget will be packaged as a 'Budget for Growth'," said Investec economist Philip Shaw. "Whether it contains any measures that make a material difference is debatable.

"I would imagine that the government got the bad news out of the way early (last year) and would want to avoid any further tightening, especially given the extent of the clawback over the next five years.

"I am sceptical that this will be a great reforming budget - although what the chancellor announces (regarding) a fuel stabiliser will be interesting," he added.

Speculation is mounting that Osborne could introduce a "fuel stabiliser" measure, whereby petrol taxation would be proportionate to the level of global oil prices - which remain elevated amid Middle East unrest.

Other economists also cast doubt on whether Osborne would have enough room to get the recovery back on track.

"With room for fiscal manoeuvre seriously constrained, any efforts aimed at stimulating economic growth will necessarily have to come from reform," said Howard Archer at IHS Global Insight.

Questioned about the possibility of more austerity measures, he added:

"I think the previous budget and spending review removed the sting. He will stick to the course set out -- keep with the spending cuts announced and the tax measures announced."

Britain's independent fiscal watchdog, the Office for Budget Responsibility, will also publish the latest official forecasts for UK economic growth and state borrowing on Wednesday.

Under last November's predictions, the OBR forecasts gross domestic product growth of 2.1% this year, 2.6% in 2012 and 2.9% in 2013.

Public state borrowing, meanwhile, was predicted to drop from £148.5bn in 2010, to just £18bn by 2015.

However, the UK economy shrank by a worse-than-expected 0.6% in the fourth quarter of 2010.

That stoked fears that austerity measures could help push the economy back into a "double dip" or second phase of recession, after a record downturn that ended in late 2009.

But recent data indicated the British economy is improving compared with the final quarter of 2010.

Manufacturing output expanded in January at the fastest annual rate for 16 years, while the nation's trade-in-goods deficit narrowed by more than expected as exports hit a record high.

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