Eying Election, Britain’s Conservatives Relax Austerity

George Osborne eases his austerity program and announces tax relief for low and middle incomes.

Chancellor of the Exchequer George Osborne in London, England, March 24, 2011
Chancellor of the Exchequer George Osborne in London, England, March 24, 2011 (HM Treasury)

With two months to go before a general election, Britain’s coalition government announced plans on Wednesday to further ease its austerity program and use the proceeds of a £900 million bank levy to finance tax relief for low-income earners.

Chancellor of the Exchequer George Osborne told Parliament in London he was able to end the squeeze on public spending a year earlier as the United Kingdom has emerged as one of the fastest-growing economies in the developed world under a coalition government of Conservatives and Liberal Democrats.

Under his latest spending plan, the deficit — which the Conservatives claim to have cut in half since they took over from Labour in 2010 — would fall to 4 percent this fiscal year. By 2018-2019, the budget would post a surplus for the first time.

Osborne insisted there would be “no giveaways” and proposed to use the savings generated by low interest rates and inflation to pay down the national debt.

But he also announced a rise in the personal tax-free allowance to £11,000 next year as well as an increase in the threshold above which Britons pay the highest rate of income tax.

Prime Minister David Cameron said last year he would raise the income tax threshold to £12,500 if he is reelected in May.

The 40 percent income tax currently kicks in at £31,900. Cameron said he would raise that to £50,000.

The measures will benefit both low and middle incomes and make it harder for Labour to claim Osborne’s Conservatives are the “party of the rich.”

Earlier, the chancellor unveiled housing tax reforms. Unlike Labour, which would tax expensive homes every year regardless of their owners’ incomes, the government wants to tax homes when they are sold. For sales under £250,000, the rate would be 2 percent or less. For homes valued at £1.5 million or more, the rate would be 12 percent.

Labour leader Ed Miliband nevertheless charged that the “gap between the chancellor’s rhetoric and the reality of people’s lives” had never been greater, adding that it was “extraordinary” the government would not invest more in the National Health Service.

A fairer criticism of Osborne’s budget policy has come from his Liberal Democrat coalition partners.

Nick Clegg, the deputy prime minister, said last year the Conservatives were “kidding themselves” and the British voters “if they are claiming that it is possible to balance the books, deliver unfunded tax cuts, shrink the state and support public services in the way that everybody wants.”

Beyond freezing working-age benefits, the Conservatives have not made clear where they would cut to wipe out the deficit by 2019.

With the National Health Service exempt from cuts, it is especially difficult to see how other departments, such as defense, education and police, would not be seriously affected.

Another more serious charge, according to the Financial Times, is that the government is neglecting the nagging problem of weak productivity.

Mr Osborne could have increased the science budget by 15 percent. The chancellor likes to sport a hard hat on construction sites but has spurned infrastructure investment in favor of repayment of low-cost public debt.

The newspaper did praise other “sensible” policy shifts, including the further devolution of powers to North England and the government’s fiscal support for North Sea oil producers. On top of a corporate tax cut from 30 to 20 percent, Osborne announced a reduction in the supplementary charge levied on oil producers to help the industry cope with falling petroleum prices.

The Guardian, a left-wing newspaper, was less impressed, pointing out that Osborne had missed his earlier deficit and debt targets — which The Guardian and Labour Party it supports criticized as unrealistic in the first place — and was putting “expediency above principle” with gimmicks designed to win votes in May.

The Telegraph‘s Dan Hodges agreed Wednesday’s was an “ultra-political budget from an ultra-political chancellor” but did not share The Guardian‘s optimism that Labour still had a fighting chance. The absence of game-changing giveaways, he argued, showed the Conservative Party was confident the election is theirs to lose.

David Cameron and George Osborne never viewed this budget as a game changer but as a game closer. It is the budget they penciled in five years ago, to underpin the election campaign they penciled in five years ago to deliver the election victory they penciled in five years ago.