Osborne boxed in by austerity on budget day

By William Schomberg

LONDON (Reuters) - Chancellor George Osborne faces the daunting task on Wednesday of delivering another austerity budget to a country impatient with near-zero growth.

The chancellor of the exchequer, as he is formally known, will make more cuts to day-to-day public spending as he tries to free up some cash for investment. He is also likely to announce another round of weaker economic forecasts.

Despite a slump in opinion polls, Osborne and Conservative Prime Minister David Cameron are sticking to their push to fix Britain's budget deficit and rising public debt, hoping for a recovery before they fight for re-election in two years time.

Cameron's spokesman prepared the way for another round of belt-tightening, saying on Tuesday that the country still faced "an unprecedented peacetime economic crisis", more than four years after the near collapse of the banking system.

Committed to fiscal austerity, Osborne may seek to get the Bank of England to do more with monetary policy to mend the weak growth that has knocked the government off its fiscal targets.

When the government took office in 2010, the budget deficit was a hefty 11 percent of gross domestic product (GDP), hammered by a global economic slump and years of over-reliance on London's giant international banks to provide tax revenues.

Britain's independent budget watchdog at the time predicted the deficit would fall to 1.1 percent of GDP by 2015-16, in part due to the tough cost-cutting measures laid out by Osborne.

The deficit in the fiscal year ending this month, on a like-for-like basis, is likely to be 7.7 percent of GDP, the watchdog said in December, among the highest in the European Union.

Rather than grow by nearly 3 percent this year - as forecast in 2010 - Britain's economy may be back in a recession again, while rising inflation is hurting households.

GROWTH QUANDARY

The government puts much of the blame on the crisis in the euro zone, Britain's main export market. The opposition Labour Party shows no mercy in hammering Osborne for his austerity.

Some inside Cameron's coalition are now showing unease. The Liberal Democrat business minister has questioned whether markets would punish Britain if it borrowed to fund growth.

Business leaders largely agree that fixing Britain's fiscal health should remain a government priority, for now. But John Longworth, head of the British Chambers of Commerce, thinks the government might need to reverse course and borrow more if there is no prospect of growth within six months: "It would be a sort of defibrillator approach to the economy," he said.

Osborne will announce on Wednesday that some government departments will have to cut spending by a further 1 percent in each of the next two financial years, on top of previously announced cuts to ministerial budgets, to provide an extra 2.5 billion pounds for investment.

"If this is the only additional investment in infrastructure in the budget, it will be a huge disappointment," said Chris Leslie, a Labour finance spokesman.

Other budget measures will include tax breaks to help working parents pay for childcare from 2015. There might also be further cut to corporate tax rates and an increase in the tax-free allowance for individuals' incomes, local media have said.

With little sign of strong growth any time soon, Britain could suffer further downgrades of its credit rating. Moody's stripped Britain of its prized triple-A rating last month.

CENTRAL BANK

Many in financial markets will pay most attention to what Osborne says about the Bank of England's remit. He wants the central bank to do more to boost growth on top of the 375 billion pounds it has spent on buying government debt. It has also cut interest rates to a historic low of 0.5 percent.

Osborne may announce a review of the Bank's official remit of targeting inflation of 2 percent, or take the bolder step of making growth less of a secondary objective for the governor.

The pound has lost about 7 percent of its value against the dollar so far this year. Much of the fall is due to speculation that the Bank might be encouraged to pump more money into the economy, either before or after its new governor, Mark Carney, arrives from the Bank of Canada in July.

Former monetary policymakers say any changes to the British central bank's remit must be made carefully.

Charles Goodhart, who served at the Bank from 1997 to 2000, argues that its flexible approach to fighting inflation had worked well for the past two decades. "Changing a long-term regime for short-term purposes would be undesirable," he said.

(Additional reporting by Andrew Osborn; Editing by Alastair Macdonald)

View the original article here

Osborne to stick with austerity, pray for growth

By David Milliken

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)

View the original article here

PREVIEW-UK's Osborne to stick with austerity, pray for growth

By David Milliken

LONDON (Reuters) - Chancellor of the Exchequer George Osborne is set to stick to his guns on austerity in next 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 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 opposition 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 ($567 billion)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 Bank 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)

View the original article here

Moody's strips Britain of triple-A rating in major blow to Osborne

LONDON/NEW YORK (Reuters) - Britain suffered its first ever sovereign ratings downgrade from a major agency on Friday when Moody's stripped the country of its coveted top-notch triple-A rating, dealing a major blow to Chancellor George Osborne.

Moody's said weak prospects for British economic growth, which have thrown the government's deficit reduction strategy off course, lay behind its decision to cut the rating by one notch to Aa1 from Aaa.

Austerity has been the watchword for Osborne's fiscal policy since his Conservative-led coalition came to power in 2010 after an election in which he vowed to defend Britain's triple-A rating, which can help keep down borrowing costs.

But a very slow recovery from the financial crisis has pushed back by at least two years the government's goal of largely eliminating the budget deficit by 2015's election.

The Labour Party blames the deficit on too much austerity.

Nonetheless, Osborne insisted now was not the time to change course. His annual budget due on March 20 is expected to show a further deterioration in the country's fiscal outlook.

"Tonight we have a stark reminder of the debt problems facing our country and the clearest possible warning to anyone who thinks we can run away from dealing with those problems," he said in a statement. "Far from weakening our resolve to deliver our economic recovery plan, this decision redoubles it."

However, the downgrade may fuel unease amongst members of his own party and his Lib Dem coalition partners that Osborne's gamble that he could slash the deficit and ensure a return to growth by the May 2015 election is failing to pay off.

Sterling fell by almost a cent to around $1.5160 after the downgrade, just off Thursday's fresh 2-1/2-year low, and analysts expected it to weaken further on Monday, even if many had seen a downgrade coming sooner or later.

"It's a pretty big deal," said Kathy Lien, managing director at BK Asset Management in New York. "We didn't see a huge reaction in the pound because it's late in the New York session. But you'll see some more aggressive selling when the markets open (in Asia) on Sunday."

Moody's said the outlook on its rating on Britain was now stable, meaning any further change is unlikely for the next year or so.

Britain joins the United States and France in having lost its triple-A rating from at least one major agency, after holding a top-notch rating from Moody's and Standard & Poor's since 1978, and from Fitch Ratings since 1994.

SLUGGISH GROWTH

Moody's said that despite considerable economic strengths, Britain's growth was likely to be sluggish due to a mix of weaker global economic activity - especially in the euro zone - and a drag "from the ongoing domestic public and private-sector de-leveraging process."

"This period of sluggish growth poses challenges to the government's fiscal consolidation program, which we now assume will extend well into the next parliament," Moody's analyst Sarah Carlson said in a telephone interview with Reuters.

But Ed Balls, the Labour Party's main spokesman on finance issues, said the Moody's decision should be a wake-up call for Osborne ahead of his annual budget statement as Chancellor of the Exchequer.

"This credit rating downgrade is a humiliating blow to a Prime Minister and Chancellor who said keeping our AAA rating was the test of their economic and political credibility."

"The issue is no longer whether this Chancellor can admit his mistakes but whether the Prime Minister can now see that, with UK economic policy so badly downgraded in every sense, things have got to change."

Howard Archer, chief UK economist at IHS Global Insight, said a new approach from Osborne was improbable.

"The strong likelihood is though that it will not materially lead to a change in his plans."

Changes are more likely from the Bank of England, which surprised markets earlier this week after it revealed that Governor Mervyn King and two other policymakers favoured restarting bond purchases to boost the economy.

They remained in the minority among their fellow policymakers but economists increasingly expect more stimulus eventually by the central bank.

This - and the central bank's tolerance of above-target inflation - have combined to put pressure on sterling while leaving British government debt relatively shielded.

Charles Diebel, a fixed income strategist at Lloyds, was sanguine about the impact of the downgrade on gilts, as U.S. and French debt was not badly affected when these countries lost their triple-A ratings.

"This has been speculated as inevitable and is most likely largely in the market. I would expect only very limited damage to the gilt curve and to sterling. Historically, losing your AAA is actually a bond bullish event," he said.

(Additional reporting by Steven C. Johnson in New York and Michael Holden in London; Editing by James Dalgleish, Jon Hemming and Eric Walsh)

View the original article here

Osborne says AAA downgrade is reminder of debt problems

LONDON (Reuters) - Chancellor George Osborne vowed to press on with the government's economic plans on Friday after Moody's Investors Service cut Britain's credit rating to AA1 from AAA.

"Tonight we have a stark reminder of the debt problems facing our country - and the clearest possible warning to anyone who thinks we can run away from dealing with those problems," Osborne said in a statement.

"Far from weakening our resolve to deliver our economic recovery plan, this decision redoubles it."

(Reporting by Michael Holden)

View the original article here