Spending cuts, tax hikes in UK emergency budget focused on cutting record national deficit

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UK makes sharpest cuts in decades in new budget

LONDON — Britain’s Treasury chief unveiled the toughest cuts to public spending in decades, a raft of tax rises and a new levy on banks in an emergency budget on Tuesday aimed at restoring the country’s ravaged public finances.

George Osborne told lawmakers his austerity package — which will see welfare payments and spending programs slashed — was necessary to make quick cuts to crippling national debts racked up during the global financial crisis.

Everyone in Britain will feel the strain, he said, from shoppers paying higher sales tax, wealthy people hit for higher capital gains taxes, banks targeted by a new levy and even Queen Elizabeth II — who accepted a freeze in her support from taxpayers.

“With this unavoidable budget we’ve had to increase taxes, we’ve had to pay the bills of past irresponsibility, we’ve had to relearn the virtue of financial prudence,” Osborne told the House of Commons.

Prime Minister David Cameron campaigned before Britain’s May election on a promise to make steeper and faster cuts to Britain’s debts than would Gordon Brown’s Labour Party — ousted following an inconclusive result when Cameron’s Conservatives formed a coalition with the smaller Liberal Democrats.

“Today we take decisive action to deal with the debts we inherited and confront the greatest economic risk facing our country,” Osborne said.

The move puts Britain, like most of Europe, at odds with the U.S. government’s view that the global recovery still needs support. President Barack Obama expressed his administration’s worries about premature spending cuts in a letter to world leaders on Friday and is expected to urge caution at the the Group of 20 summit in Canada this weekend.

But in the wake of Greece’s near-bankruptcy, European leaders have resolutely shifted their focus to reducing debt.

Osborne said most public sector workers except the lowest-paid will endure a two-year pay freeze in his budget, while the majority of government departments face budget cuts of 25 percent to raise 30 billion pounds per year ($44 billion) in expenditure savings.

He said Britain will impose a levy on bank balance sheets from January 2011 to raise about 2 billion pounds ($3 billion) per year. France and Germany have agreed to impose similar levies, he said.

At least 11 billion pounds will be saved through welfare cuts, by freezing child benefit rates for three years, cutting tax credits for middle-class families and limiting housing benefits. New medical tests will be introduced for disability allowances and Britain will raise the state pension age to 66.

Osborne confirmed that value-added tax on goods and services will rise from 17.5 percent to 20 percent from Jan. 4, though essentials including food, children’s clothing and books will remain exempt.

The capital gains tax will rise from 18 percent to 28 percent for richer taxpayers.

Harriet Harman, acting leader of the opposition Labour Party, accused Osborne of offering “a reckless budget that pulls the rug out from under the economy.”

“It’s the same old Tories, hitting hardest at those who can least afford it and breaking their promises,” Harman said.

Leftist Labour legislator John McDonnell said the scale of welfare cuts may prompt public unrest. “Cuts on this scale will inevitably be met by resistance from not just trade unions but from across our community,” he said.

Analysts said moves to reduce Britain’s deficit would appease markets anxious about Europe’s turbulent economies.

“The market was looking for a legitimate austerity package,” said Duncan Higgins, senior analyst at currency dealer Caxton FX.

Jonathan Loynes, chief European economist at Capital Economics, said the budget “looks to be an even tougher affair than was generally anticipated.”

Seeking to stimulate private sector growth, Osborne is cutting corporation tax from 28 percent to 24 percent over four years. About 880,000 extra low paid workers will be exempted from income tax under his plans.

He said 7.9 million pounds ($11.6 million) in government funding to Queen Elizabeth II’s royal household, known as the Civil List and used to pay salaries and the costs of official functions, would be frozen for a year.

Osborne told the House of Commons his program would allow the country’s new government to cut borrowing from about 10 percent of GDP to 1 percent within its five-year term of office.

Britain now has “the largest budget deficit of any economy in Europe with the single exception of Ireland,” Osborne said.

The British government’s borrowing eased in May but the nation’s debt still rose above 900 billion pounds ($1.33 trillion).

Former Prime Minister Brown, who led the previous government for three years after a decade as Treasury chief, wasn’t in the Commons for the speech. Aides said he was visiting schools in his Scottish district.

AP reporters Jill Lawless and Robert Barr in London contributed to this report.