June 21, 2010 / 5:27 AM / 9 years ago

UK to dodge Greek fate with tough budget - Osborne

LONDON (Reuters) - The biggest threat to the economy is its huge budget deficit, and an emergency budget on Tuesday will save the country from the fate of debt-stricken Greece, Chancellor George Osborne said on Sunday.

Britain's Finance Minister, George Osborne (L), speaks to BBC journalist Andrew Marr during a televised interview in London June 20, 2010. REUTERS/Jeff Overs/Handout

Measures expected to be included in the budget include a bank levy and reform of welfare benefits and public sector pay. Other plans include payroll tax breaks for new businesses, a council tax freeze and a review of public sector pensions.

“You can see in Greece an example of a country that didn’t face up to its problems, and that is the fate that I want to avoid,” Osborne told the BBC in an interview.

“I’m absolutely clear, I don’t want the question even asked, ‘Can Britain pay its way in the world?’ I’m going to prove on Tuesday that we can,” he said, adding that the budget’s austerity measures would be staggered over five years.

The budget deficit is at about 11 percent of national output, and reducing the deficit is the centrepiece policy of the new coalition government, made up of the Conservative Party and the Liberal Democrats.

Tuesday’s budget is expected to be the tightest in at least 30 years, and with public sector job losses and deep pay and benefit cuts expected, the plan is likely to stoke public discontent and strain the fledgling ruling alliance.

Osborne indicated capital gains tax — a tax on the sale of assets such as real estate and shares — would rise, despite vigorous opposition from senior Conservative politicians.

The levy is currently at 18 percent, and some workers switch their income revenue, which is taxed at between 20 and 50 percent, to capital gains to pay less tax.

“Here is a tax where at the moment we see massive income tax evasion, we see people shifting their income ... and that’s not fair given the current situation, so we’ll deal with that,” Osborne said, without saying by how much the levy will rise.

He also raised the prospect of unilateral action to impose a bank levy, aimed at clawing back billions paid by the state to bail the financial sector out after the 2008 financial crisis.

Countries are trying to coordinate to introduce new banking rules in tandem to avoid regulation arbitrage, but progress so far has been slow.

“The previous government didn’t want a bank levy, because they wanted every country in the world to sign up to one before they would agree to one in Britain. I don’t think that’s fair, and I’m going to ask the banks to pay a bank levy.”

SWEETENERS

One of the few sweeteners expected in the budget is a payroll tax holiday for the first 10 employees hired by new businesses outside the southeast, government sources said.

The maximum a business can claim per employee will be 5,000 pounds a year for those earning less than 44,800 pounds, a three-year scheme costing 900 million pounds and meant to boost the economy in less prosperous parts of the country.

Sources familiar with Osborne’s budget said he would also tell local authorities in England not to raise council tax in the 2011-2012 financial year.

Osborne told the BBC he had set up a commission on public service pensions, seen by some critics as too costly, to be chaired by John Hutton, a former opposition Labour party cabinet minister, a move meant to produce a non-partisan review.

The commission will produce an interim report in September, and a final report in time for next year’s budget.

Critics of deep spending cuts soon say it puts Britain at risk of a “double dip” recession, just as it emerges from its worst recession since World War Two.

A ComRes poll for the Independent on Sunday found support for the three main political parties largely unchanged since the May 6 general election, but showed divisions over some possible austerity measures.

Most of those polled last week agreed child benefits should be withdrawn from wealthier people, 48 percent agreed they would rather pay higher income tax than see public services cut, and 49 percent disagreed that the government was exaggerating financial problems to justify public sector cuts.

Reporting by Mohammed Abbas and Sumeet Desai, writing by Mohammed Abbas; Editing by Peter Graff

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