British finance minister Alistair Darling cut his borrowing forecasts today and announced a £2.5 billion package to promote growth in the last budget before an election that is just weeks away.
Mr Darling had repeatedly said there would be no big giveaways given the record budget deficit Britain faces, which has spooked financial markets. But with an election expected on May 6th that could throw his Labour government out of power after 13 years, some concessions were always likely.
Delivering his budget speech to the House of Commons, he said he would scrap duty on house purchase on homes worth less than £250,000 for first-time buyers but pay for that with a one percentage point rise in duty to 5 per cent for houses worth more than £1 million.
"Those who have benefited the most from the strong growth in incomes in past years should now pay their fair share of tax," Mr Darling told parliament. That prompted cheers from his centre-left Labour party colleagues and the move should play well with Labour's core vote coming on the heels of a new 50 per cent tax rate for high earners and a one-off tax on bankers' bonuses that the minister said would raise £2 billion, nearly four times expectations.
He also froze inheritance tax thresholds for four years and promised to push the idea of a global levy on banks at international meetings in Washington next month. Partially state-owned RBS and Lloyds would provide £94 billion of new loans to businesses, he said.
Opposition Conservatives say they would introduce a unilateral tax on banks similar to that planned by President Barack Obama if they win the election, likely to be held in early May, but will levy it at a lower level if they cannot do it as part of an international initiative.
Britain's record budget deficit remains front and centre for investors after some ratings agencies have suggested the UK's top-notch credit rating could be under threat without a clear plan to cut debt.
Mr Darling said he was able to revise down his forecasts for the budget deficit in the current and next fiscal year but the recovery was still fragile and real fiscal tightening should only start next year.
Public sector net borrowing in 2009/10, Mr Darling said, would come in at £166.5 billion, or 11.8 per cent of GDP, compared with a December pre-budget report forecast of £177.6 billion.
In 2010/11, borrowing is expected to come in at £163 billion versus £176 billion previously forecast. Future years have also been revised down.
"The next element of our fiscal plan is to control public spending. But to cut spending now, before the recovery is self-sustaining, would be short-sighted and counter-productive," Mr Darling said.
The Conservatives say they would cut the deficit faster and start tightening this year though they still have to spell out how they would make this happen beyond saying they would hold a budget within 50 days of being elected.
The Conservatives are ahead in opinion polls but their lead has shrunk markedly in recent weeks. Most polls are now pointing to a hung parliament where no party has a majority -- a nightmare scenario for markets who fear it could leave a government without the clout to make unpopular spending cuts.
Mr Darling also announced duty rises for on beer, wine and spirits. Alcohol duties will go up by 2 percent above inflation for two more years until 2013 but cider will go up by 10 percent above inflation, he said. Tobacco duty will increase by 1 per cent above inflation and increase 2 percent in real terms each year until 2014.
Delivering his budget speech in the House of Commons, Mr Darling said the budget was taking place as the UK economy is emerging from the deepest global recession for more than 60 years.
He said prospects for the global economy are much more positive than a year ago but warned there are still uncertainties and financial markets are “febrile”.
Mr Darling said a bank bonus tax introduced in December was now expected to raise £2 billion, more than twice as much as initially forecast.
"Borrowing this year should now be £11 billion lower than forecast, at £167 billion," Mr Darling said. "In 2010-11, in part because of one-off factors boosting receipts such as this year's tax on bank bonuses, borrowing will be £163 billion." By 2013-14, he said debt would be £100 billion lower than was expected at last year's budget.
Mr Darling said more countries now agree on the need for an international systemic tax on banks, which must be brought forward quickly, as he will urge international finance ministers in Washington next month.
A Reuters poll of analysts this week predicted government borrowing this fiscal year and next could be around £10 billion lower in each year than predicted in December's pre-budget report.
But that would still be coming down from forecasts of above £170 billion (€189.7 billion), or around a record 12 per cent of gross domestic product, in both 2009/10 and 2010/11. A survey of all 16 Gilt-Edged Market Makers predicted the government would have to sell £187 billion (€208.7 billion) worth of bonds in the tax year starting in April.
Agencies