Osborne to stick with austerity, pray for growth

LONDON Mon Mar 18, 2013 11:53pm GMT

Britain's Chancellor of the Exchequer, George Osborne, is seen waving after delivering his keynote speech at the Conservative Party conference in Birmingham, central England in this October 8, 2012 file photograph. REUTERS/Darren Staples

Britain's Chancellor of the Exchequer, George Osborne, is seen waving after delivering his keynote speech at the Conservative Party conference in Birmingham, central England in this October 8, 2012 file photograph.

Credit: Reuters/Darren Staples

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LONDON (Reuters) - The Chancellor is set to stick to his guns on austerity in this week's budget, despite increasing calls for a change of course, as he bets that growth will get back on track before an election in 2015.

Monetary policy - not tax and spending - may see the biggest shift in George Osborne's budget statement on Wednesday, amid signs he plans to tweak the Bank of England's inflation-fighting remit to spur an economy once again threatened with recession.

Near-zero growth and slow progress on deficit reduction have battered Osborne's reputation since he helped the Conservatives to power in 2010 with promises of bold change. He now ranks as Britain's least popular Chancellor in almost 20 years.

Once viewed as his party's foremost tactician, Osborne will be glad if he can avoid the political blunders of last year's budget when a series of U-turns pushed the Labour party's lead over the Conservatives to more than 10 percentage points.

Polling firm Ipsos MORI said this week the Conservatives had their lowest share of voter support in a decade at 27 percent.

Osborne said on Sunday there was no alternative to austerity, and that slowing deficit reduction would put Britain at risk of the same fate as Cyprus which has announced a levy on bank accounts to help fund an international bail-out.

"In the end this country has got to pay its way. We can't just keep on thinking the answer to our problem is more borrowing," he told BBC television.

The Labour Party wants a slower pace of cuts, and on Sunday its finance spokesman Ed Balls damned the government's policies as "the economics of the lunatic farm".

"The only reason why they won't now change course is to avoid their own political humiliation," he told the BBC.

Some Conservatives are pressing Osborne for tax breaks, funded by cuts in welfare and overseas aid, and increasingly murmur about Prime Minister David Cameron's leadership.

But Cameron backs Osborne. "This month's budget will be about sticking to the course," he said on March 7.

Media on Sunday said the government was likely to press on with plans to lower corporation tax and raise the amount of income people can earn without paying tax, as well as postpone rises in fuel tax, increase childcare subsidies and issue 10 billion pounds in government guarantees for new home-building.

DEFICIT CHALLENGE

Britain's public finances were in terrible shape when the Conservatives and their Liberal Democrat partners took power in 2010. The budget deficit had peaked at more than 11 percent of gross domestic product after the deepest recession in decades.

Since then the deficit has fallen to 8 percent of GDP, not far enough to satisfy the credit ratings agencies which Osborne placed at the heart of his economic policy.

Moody's stripped Britain of its prized triple-A rating in February and Standard & Poor's and Fitch could follow suit.

Economists expect a modest deterioration in Britain's latest economic and fiscal forecasts that underpin Osborne's budget.

The last forecasts were made as recently as December, but data since then has shown the economy shrank in the last three months of 2012 and remained weak in early 2013. Forecasts for growth of 1.2 percent in 2013 and 2.0 percent in 2014 are likely to be revised down by a few tenths of a percentage point.

Osborne's main objective of eliminating Britain's structural budget deficit, which strips out factors such as investment spending, keeps getting pushed back to the end of the official five-year forecasting period. In December, he had to abandon another goal of getting the debt-to-GDP ratio falling by 2015.

Determined not to borrow more, Osborne wants the Bank of England to take even more of the strain of supporting Britain's economy. It has already bought 375 billion pounds of government debt after cutting interest rates to a record low 0.5 percent.

To this end, Osborne is expected to make it easier for the BoE to justify its current practice of ignoring short-term price shocks and provide further monetary stimulus.

He may also announce a wider review of how best the central bank should support the economy to coincide with the arrival of new governor Mark Carney in July. That would be in line with Cameron's mantra of "fiscal responsibility, monetary activism".

ALTERNATIVE APPROACH?

Osborne's budget is unlikely to assuage critics which include many business groups and some in the ruling coalition.

Liberal Democrat business minister Vince Cable has said markets may tolerate extra borrowing to fund investment.

This is anathema to Osborne but has been championed by Jonathan Portes, head of the National Institute of Economic and Social Research, Britain's leading macroeconomic think-tank.

"The government has borrowed literally tens if not hundreds of billions of pounds more than it planned a few years ago, with absolutely no adverse reaction on the bond market," he said.

"The idea that we could not afford to borrow tens of billions of pounds more to finance productive investment and house-building seems to me pretty absurd," he added.

Other economists are less sure and the public is divided on the merits of austerity. Despite its overall poll lead, Labour is only on a par with the Conservatives on economic competence.

"There is a bit of fatalism out there," said Gideon Skinner, research director at Ipsos MORI. "(Voters) are not very happy with the Conservatives, but Labour still hasn't convinced (voters) that they have got the right answer."

(Editing by Keiron Henderson)

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