- Associated Press - Tuesday, June 22, 2010

LONDON (AP) — Britain announced the toughest cuts to public spending in decades and new tax increases on Tuesday in an emergency budget aimed at sharply reducing the country’s record debts.

The pain fell on shoppers, who will be paying higher sales taxes; wealthy people, who will be hit for higher capital gains taxes; and banks, targeted by a new levy. Even Queen Elizabeth II, who accepted a freeze in her support from taxpayers, will feel the pinch.

There was good news for business, which will benefit from a cut in corporation tax from 28 percent to 24 percent over four years, and for cider drinkers, who will be taxed less for their drinks.

Treasury chief George Osborne told the House of Commons his program would allow the country’s new government to cut borrowing from about 10 percent of gross domestic product to 1 percent within its five-year term of office.

“The coalition government has inherited from its predecessor the largest budget deficit of any economy in Europe with the single exception of Ireland.

“One pound in every four we spend is being borrowed. What we have not inherited from our predecessor is a credible plan to reduce their record deficit.”

Harriet Harman, acting leader of the opposition Labor Party, accused Mr. Osborne of offering “a reckless budget that pulls the rug out from under the economy.”

“Yes, it’s his first budget, but it’s the same old Tories, hitting hardest at those who can least afford it and breaking their promises,” Ms. Harman said.

Jonathan Loynes, chief European economist at Capital Economics, said the budget “looks to be an even tougher affair than was generally anticipated.”

“Adding the new measures to the previous government’s plans points to a total fiscal tightening of over 6 percent of GDP over the next five years, the bulk of which — 77 percent — will come from real spending cuts,” Mr. Loynes said.

Mr. Osborne confirmed that value-added tax — a levy on goods and services — will rise from 17.5 percent to 20 percent from Jan. 4, though essentials including food, children’s clothing and books will remain exempt.

Most public-sector workers except the lowest paid will endure a two-year pay freeze, while the majority of government departments face budget cuts of 25 percent to raise 30 billion pounds per year ($44 billion) in expenditure savings.

Mr. Osborne said Britain will impose a new levy on banks from January 2011 that is expected to raise 2 billion pounds ($3 billion) per year. France and Germany have agreed to impose similar levies, Mr. Osborne said.

The Treasury chief said 7.9 million pounds ($11.7 million) in government funding to the Queen Elizabeth II’s royal household, a contribution known as the Civil List, would be frozen for a year. About 70 percent of the Civil List expenditure goes to staff salaries, Buckingham Palace says. The funding also supports the cost of official functions such as receptions and entertainment for visiting heads of state.

Mr. Osborne said he was scrapping a one-off payment to pregnant women and freezing child benefit payments for three years.

“It is simply not possible to deal with a budget deficit of this size without undertaking lasting reform of welfare,” Mr Osborne said.

He also announced a rise in capital gains tax, from 18 percent to 28 percent, that will affect mainly rich households.

The British government’s borrowing eased in May, but the nation’s debt still rose above 900 billion pounds ($1.33 trillion).

Borrowing dropped from 17.4 billion pounds ($25.8 billion) in May last year to 16 billion pounds ($23.7 billion) last month, according to official statistics. Still, public-sector debt rose to 903 billion pounds ($3.34 trillion), or 62 percent of GDP.

Prime Minister David Cameron’s coalition government, which took office in May, already has announced spending cuts of 6.2 billion pounds ($9.19 billion) and on Friday canceled another 2 billion pounds ($2.96 billion) worth of capital spending.

Former Prime Minister Gordon Brown, who led the previous government for three years after a decade as Treasury chief, wasn’t in the Commons for the speech. Aides said he was visiting schools and getting reacquainted with people in his Scottish district.

AP reporters Jill Lawless and Robert Barr in London contributed to this report.


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