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Tough Love

UK rolls out tough spending cuts

May 24 2010 16:40

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London - British Finance Minister George Osborne detailed £6.2bn of spending cuts on Monday in the latest bout of EU belt-tightening, warning much worse lay ahead in an emergency budget next month.

Analysts said the cuts, which were largely as expected, were a useful downpayment on tackling the record budget deficit but would be dwarfed by additional austerity measures that would be needed to safeguard Britain's triple-A credit rating.

Osborne's deputy David Laws warned the cuts were intended to "send a shockwave through government departments", and unions said they would hit services, damage the economy and put thousands of jobs at risk.

Given some breathing room by debt figures for 2009/10 that undercut estimates, Osborne said the new Conservative/Liberal Democrat coalition government, in office for less than two weeks, would not shirk from its top priority of cutting the deficit, running at close to 11% of GDP.

Britain's announcement comes on the heels of emergency austerity measures in other European Union countries weighed down by hefty deficits, including Spain and Portugal, as the region's policymakers look to prevent a debt crisis from spreading beyond Greece. Italy's cabinet meets to approved deficit-cutting measures on Tuesday.

Debt servicing costs in the eurozone periphery states have ballooned this year, while they have held at relatively low levels in the UK. UK government bonds rose by midsession on Monday as traders welcomed news of Osborne's breakdown of where the cuts would fall, with the June gilt future rising 24 ticks to 120.21.

Sterling was mixed, rising against the euro but losing ground against the dollar.

"This is the first time this government has announced difficult decisions on spending. It will not be the last," Osborne said at a news conference flanked by Laws.

Osborne's Conservative Party had pledged before the May 6 election to start spending cuts in the current fiscal year. The Lib Dems had said such a move would endanger the recovery but have now signed up to the immediate cuts.

"This action is designed to send a shock-wave through Government departments, to focus ministers and civil servants on whether spending in these areas is really a priority in the difficult times we are now facing," said Laws."

"... The years of public sector plenty are over. But the more decisively we act, the more quickly and strongly we can come through these tough times."

End to waste

In a concession to the Lib Dems, £500m of the £6.2bn in reductions will be reinvested in further education and social housing.

But the rest would be used to bring down the deficit. Government advisory bodies - known as "quangos" - would lose £513m in funding. There would be a hiring freeze across the civil service and almost all departments would have to find savings.

The business ministry, for example, will have its budget cut by more £800m.

"The new government deserves credit for identifying these cuts on a department-by-department basis in the space of less than two weeks," said Hetal Mehta, senior economic advisor to the Ernst & Young ITEM Club.

"But we must remember that £6bn is still a drop in the ocean compared with the scale of tightening that will be required over the course of the parliament. The emergency Budget and the subsequent Comprehensive Spending Review remain the crucial junctures for assessing how credible the deficit reduction programme will be."

While the task ahead is clearly massive, figures released last week suggested that at least the worst may be over for public finances, with tax receipts up sharply.

Borrowing for 2009/10 was revised lower by £7.5bn. Excluding financial sector interventions, it stood at £156.1bn, some £10bn lower than predicted in the budget in March.

But there is no escaping the fact government spending will have to come down significantly, putting the coalition on a collision course with increasingly militant unions.

"We do not accept that huge spending cuts are necessary or desirable, and we do not believe it is credible for the government to say it can protect public sector jobs and services while taking the axe to departments in this way," said Public and Commercial Services Union general secretary Mark Serwotka.

Bank of England Monetary Policy Committee member Kate Barker said she thought extra fiscal tightening would act as a headwind to growth but said that markets might take fright if nothing was done to bring down the deficit.

"So it is very important that the ... (June 22 budget) is something which is going to avoid further rises in gilt yields. And this tells us that fiscal policy faces some really very difficult choices," Barker told the Financial Times in an interview published on Monday.

 
  - Reuters
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