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U K News
U.K.'s Osborne Likely to Signal Further Austerity
From the Wall Street Journal of Mon, 01 Dec 2014 11:29:56 EST
Britain's Chancellor of the Exchequer George Osborne arrives at a European Union finance ministers meeting in Brussels on Nov. 7.
Britain's Chancellor of the Exchequer George Osborne arrives at a European Union finance ministers meeting in Brussels on Nov. 7. Reuters

LONDON—U.K. Treasury chief George Osborne on Wednesday is expected to deliver the message that Britain is in for another dose of government belt-tightening if his Conservative Party wins a general election next year, as data show the economy’s recovery remains patchy.

The closely watched update on Britain’s public finances comes at a delicate time for Mr. Osborne and his close ally, Prime Minister David Cameron , who are preparing for an election in May. Their economic record will be a central issue and a key question will be whether British voters will be willing to stomach further cuts and return the Conservative Party to power.

Data released Monday showed new mortgage approvals fell in October but manufacturing output remained buoyant, underscoring the crosscurrents in the nearly two-year-old recovery.

Economists expect the treasury chief to present forecasts showing that despite the economy’s return to growth he remains years away from meeting his self-imposed goal of closing the U.K.’s budget deficit. That implies tax increases or further cuts to public spending will be needed after 2015.

“I think the British public understands that difficult decisions need to be taken so that Britain can live within its means,” Mr. Osborne said Sunday in an interview with the British Broadcasting Corp.

Britain’s Office for Budget Responsibility, which produces the government’s economic forecasts and monitors the U.K.’s public finances, is expected to say Wednesday that the government will borrow more this fiscal year than it predicted in March and that the budget deficit—which Mr. Osborne originally aimed to have largely eliminated by next year—will persist even further into the next parliamentary term.

“Five years on [since Cameron took office] and we are not in a great position,” said Azad Zangana, European economist at Schroders PLC, which manages £276 billion ($434 billion) of assets, including U.K. government bonds. Mr. Zangana said it is important to close the deficit to ensure the U.K. can weather any future economic storms. “The longer the deficit remains this high, the more difficult it becomes for us to be able to react.”

Mr. Osborne and Mr. Cameron took office in 2010 promising to wrestle down the U.K.’s inflated debt load, a move that put the U.K. at the center of a global debate over the wisdom of reining in budget deficits soon after a downturn.

At the time, Mr. Osborne set himself the goal of closing within five years the so-called structural deficit, a notoriously hard-to-measure chunk of the shortfall between income and spending that doesn’t respond to quicker economic growth.

Mr. Osborne, the Chancellor of the Exchequer, argues that his plan is delivering growth and bringing down unemployment. But he has repeatedly had to admit that reducing the deficit is taking longer than he planned, laying the blame largely on soggy growth in the neighboring eurozone, Britain’s biggest export market.

Supporters of Mr. Osborne’s approach say his fiscal restraint has helped inspire confidence among investors. But critics counter it has hurt growth and he would have been better off delaying until the economy had fully healed.

The main opposition Labour Party says Mr. Osborne has also presided over an unprecedented collapse in British living standards. Prices rose faster than wages for most of his term in office, a squeeze on incomes Labour says was exacerbated by cuts to welfare and other austerity policies. “People are worse off,” said Ed Balls, Labour’s economy spokesman, in a recent interview.

The OBR’s previous forecast in March showed Mr. Osborne reaching his target in the fiscal year ending in March 2018—three years later than he initially hoped—and eliminating the overall budget deficit the following fiscal year. But progress since then has been slow.

Some economists say it could take until the fiscal year ending in 2020—or almost a decade—for the budget gap to finally close.

In October, seven months into the fiscal year, Mr. Osborne had already borrowed roughly three-quarters of the £86.6 billion ($136 billion) the OBR predicted he would in the 12-month period ending in March 2015.

Softer-than-expected tax revenues have had a big hand in throwing Mr. Osborne off course. Weak growth in the first three years of his stewardship of the economy sapped corporate, property and income taxes and buoyed spending on welfare, making it harder to narrow the deficit.

But a recent recovery hasn’t been accompanied by a similarly strong boost to tax receipts, exposing what economists fret could be a lasting problem for the public finances: A dwindling pool of well-paid workers to tax.

The economy has grown at an annualized rate of close to 3% this year and unemployment has tumbled. Yet taxes on income and wealth rose just 0.1% between April and October compared with the same seven months a year earlier, largely because of weakness in wage growth and a rise in the proportion of the workforce in low-paid jobs who don’t pay much tax.

Mr. Osborne has in the past used his year-end budget update to announce new fiscal policies but analysts say the slow repair of the public finances means he has less room for giveaways than on previous occasions. New funding for hospitals and roads has already been announced. A final budget in March will give him his last chance to woo undecided voters with new promises on tax and spending.

—Jon Sindreu contributed to this article.

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