Tuesday, 22 June 2010 12:43

Osborne Seems to Have Read the BoomBustBlog UK Finances Analysis, His U.K. Deficit Cuts May Rattle Coalition

In the British chapter of our tome on the Pan-European Sovereign Debt Crisis, the UK is going according to plan. Subscribers should feel pride (and hopefully profit) in having read about these actions months before they occurred.

From Bloomberg: Osborne’s U.K. Deficit Cuts May Rattle Coalition

June 22 (Bloomberg) -- U.K. Chancellor of the Exchequer George Osborne’s plans to cut spending by the most since the 1980s in an emergency budget today may test the durability of the six-week old coalition and the strength of union opposition. The prospect of an increase in value-added tax may lead some Liberal Democrat lawmakers to rebel against the Conservative led-coalition, as unions oppose steps to cut jobs, public workers’ pay and welfare. The spending reductions and tax increases also risk tipping the economy back into recession.

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The austerity plan will set the size of the budget while leaving details of cuts until Osborne maps out departmental plans in the fall. Fitch Ratings said June 8 the U.K. needs to speed deficit cuts to guard its top credit rating. The U.K.’s Office of Budget Responsibility last week estimated debt would rise to 74 percent of GDP in 2015 from 62 percent in the current year. The deficit will be 10.5 percent of GDP this year. “It’s going to be bad everywhere, and the removal of public demand could be nasty” said Shamik Dhar, an economist at Aviva Plc, which has 262 billion euros ($323 billion) under management. “I don’t think the structural deficit is going to be as bad, and interest rates at near zero are going to help.” The pound declined against the dollar and gilts advanced as some investors anticipated the spending cuts would prompt the Bank of England to maintain its record-low benchmark interest rate of 0.5 percent.

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Some economists and opposition parties say current government forecasts of 2.6 percent growth in 2011 and 2.8 percent in 2012 may be scaled back as Osborne’s measures suck resources out of the economy. As he battled to stave off defeat during this year’s election campaign, Labour Prime Minister Gordon Brown said immediate spending cuts sought by Conservatives risked a double-dip recession. Alistair Darling, Osborne’s Labour Party predecessor, said Osborne is overplaying the risk of a sovereign debt crisis to shrink the size of the state. Darling yesterday told reporters in London yesterday that he would be “astonished’ if Osborne holds back from increasing VAT to 20 percent from 17.5

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To cushion the impact of spending cuts, Osborne will propose raising the ceiling at which the lowest rate of income tax is levied by 1,000 pounds to 7,475 pounds, exempting 880,000 low earners from payment, said a person with knowledge of the plans. He’ll also seek to maintain spending on schools, hospital buildings and other infrastructure projects. Part of the effort to sell the austerity measures to voters will include a levy on banks’ assets or liabilities that will raise at least 2 billion pounds a year, according to three people with knowledge of the plans. Osborne told the British Broadcasting Corp. June 20 that he’ll press ahead with plans to increase capital-gains tax to prevent rich people from declaring earned income, which is subject to as much as 50 percent tax, as a capital gain that is liable to an 18 percent tax.

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Of the U.K.’s current 704 billion-pound annual budget, more than a quarter, or 196 billion pounds, is targeted for ‘‘social protection” measures, including welfare and pensions. Total public-sector pay totals about 160 billion pounds a year. Osborne said in his BBC interview that the welfare budget is “out of control” and that it discourages people from working because they can rely on state handouts. The effort to trim the deficit will also focus on the public-sector workforce, Osborne said. He told the BBC that many of Britain’s 6.1 million employees face a wage freeze extending beyond this year. The last Labour government added 900,000 workers to the state payroll during its 13 years in power, more than a third of them in the past two years to help counter the recession. The government now accounts for one in five jobs in Britain.

I'd like to take this time to share page 4 of our subscription-based analysis of the UK's predicament (subscribers, see
File Icon UK Public Finances March 2010)
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UK report pg 4

You see, things are materially worse than Britain is letting on. Now, if we were to reverse the exaggerations, optimistic assumptions and outright lies (speaking of which, reference Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse!)...

uk_economic_estimtes.png


… and in terms of government balance over-optimism???

uk_gaovernment_balance_projections.png

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Last modified on Tuesday, 22 June 2010 12:43