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British Treasury Chief Warns of E.U. Exit Risks and Cuts Growth Forecasts George Osbourne Warns of Brexit Risks and Cuts Growth Forecasts
(35 minutes later)
LONDON — With a referendum on European Union membership looming, George Osborne, Britain’s chancellor of the Exchequer, warned in his annual budget presentation on Wednesday of the risks of a British exit from the bloc, lowered the country’s economic growth forecasts and unveiled a tax on sugary drinks. LONDON — In a budget meant to appeal to voters before a looming referendum, Britain’s chancellor of the Exchequer, George Osborne, on Wednesday mainly offered tax breaks, while warning the public against the risks of opting to quit the European Union.
After the Conservative Party, led by Prime Minister David Cameron, won a resounding victory in the British general election in May, now would normally be the time for bold economic measures — leaving years for voters to forget any financial pain before they again choose a government. Despite a worsening economic outlook and a downward revision of growth forecasts, Mr. Osborne postponed billions of pounds of further reductions in public spending that he would need to keep his budget plans on track, while offering some significant tax cuts for individuals and businesses.
Instead, Mr. Osborne sounded the alarm over slowing global growth, and he warned voters of the economic risks of a British exit from the European Union, which he opposes. And though he announced popular measures including tax cuts and more resources for education, he also said that he would cut government spending by a further 3.5 billion pounds, or about $5 billion, though not until later in this decade. The most controversial item was a new tax on sugary soft drinks, a measure meant to combat childhood obesity. The leader of a soft-drink industry trade group dismissed the tax as “absurd.”
“The outlook for the global economy is weak,” Mr. Osborne told lawmakers in the House of Commons. “It makes for a dangerous cocktail of risks, but one that Britain is well prepared to handle if we act now so we don’t pay later.” Over all, though, Mr. Osborne’s budget statement seemed intended to avoid antagonizing key groups of voters before the June 23 referendum on whether Britain should remain in the 28-nation European Union or leave it in a so-called Brexit.
He added, “Britain is not immune to slowdowns and shocks.” Mr. Osborne, who like Prime Minister David Cameron, favors staying in the European Union, warned of economic instability if Britain votes for Brexit.
Forecasts for economic growth this year were lowered to 2 percent from 2.4 percent, and expansion next year was revised to 2.2 percent. “Britain will be stronger, safer and better off inside a reformed European Union,” Mr. Osborne said in Parliament, adding that “we should not put at risk all the hard work that the British people have done to make our country strong again.”
Mr. Osborne also told the House of Commons that Britain would “be stronger, safer and better off inside a reformed European Union.” He added that turbulent financial markets, low productivity in Western nations and a weak outlook for the global economy made for “a dangerous cocktail of risks.”
He added, “I believe we should not put at risk all the hard work that the British people have done to make our country strong again.” The budget is expected to be approved by Parliament, coming as it does from the treasury chief of the controlling Conservative Party.
The European Union referendum — less than 100 days away — and the risk of a so-called Brexit, combined with slower-than-expected economic growth, has put Mr. Osborne in a tight spot. The most unexpected initiative was the sugar tax on the soft-drink industry. This would apply, starting in April 2018, to drinks with a total sugar content above 5 grams per 100 milliliters, with a higher rate for beverages with more than 8 grams per 100 milliliters. Milk-based drinks and fruit juices would be exempt.
He cut income and business taxes, in line with a pledge to not increase income and value-added taxes, and announced several infrastructure projects, including rail and road improvements. “Five-year-old children are consuming their body weight in sugar every year,” Mr. Osborne told lawmakers, adding that “one of the biggest contributors to childhood obesity is sugary drinks.”
But he said that public spending would be cut by £3.5 billion. Mr. Osborne has been squeezing public expenditure since 2010, when he began as chancellor in a coalition government led by Mr. Cameron. The government, which has promised to protect some crucial areas of spending like health, is also committed to running a budget surplus by 2019-20. The plan to target soft drinks, but not other products with a high sugar content, was derided as “simply absurd” by Gavin Partington, director general of the British Soft Drinks Association, which says it represents a range of British manufacturers, importers and suppliers.
“The economy is smaller and growing slower than we thought a few months ago,” wrote Kallum Pickering, senior British economist at Berenberg Bank in London, in an analysis before Mr. Osborne’s budget announcement. “Fiscal consolidation is only halfway complete — more cuts are needed. And the Conservative Party is going through an internal conflict over Brexit.” “We are extremely disappointed by the government’s decision to hit the only category in the food and drink sector which has consistently reduced sugar intake in recent years — down 13.6 percent since 2012,” Mr. Partington said in a statement.
Mr. Pickering noted that, because of a downward revision in data in December, the British economy is £18 billion smaller in nominal terms than had been thought, opening up a hole in Mr. Osborne’s budget plans. Mr. Osborne’s budget also announced moves to close tax loopholes, including one in which foreign suppliers use sites like eBay and Amazon to sell goods without paying Britain’s sales tax, known as the value added tax.
On Sunday, Mr. Osborne told the BBC that the world was “more uncertain” than at any time since the financial crisis. Further cuts equivalent to 0.5 percent of public spending by 2020 were needed, he said, adding that this was “not a huge amount in the scheme of things.” The budget was more benign than might normally be expected at this point in the political cycle, given the state of the economy. After last May’s general election victory for the Conservatives, led by Mr. Cameron, right now might typically be the time for aggressive economic discipline, leaving years for voters to forget any financial pain before they choose a new government.
The chancellor also unveiled a tax on sugary drinks, pledging to channel the resulting £520 million into increased funding for sports at schools. Though pure fruit juices and milk-based drinks will be excluded, the move sent shares in the drinks makers A. G. Barr and Britvic sharply lower. Britain’s economic picture has worsened in recent months. Official growth forecasts for 2016 were revised downward on Wednesday, to 2 percent, compared with the 2.4 percent predicted earlier.
The stakes are high for Mr. Osborne, an intensely political chancellor and a candidate to succeed Mr. Cameron, who has announced that he will not lead the Conservative Party into the 2020 elections. One of Mr. Osborne’s main rivals for the top job, Mayor Boris Johnson of London, has raised his profile by campaigning for a British exit from the European Union. For next year, the growth forecast was trimmed to 2.2 percent, down from 2.5 percent previously.
Much has changed since November of last year, when Mr. Osborne smoothed the course of his deficit-reduction plan after a forecast that higher tax receipts and lower-than-expected debt interest would lead to a £27 billion improvement in public finances. The revised projections are based on the assumption that Britain stays in the European Union. The Office for Budget Responsibility, whose job it is to provide an independent analysis of public finances, had warned of “an extended period of uncertainty” about Britain’s relationship with the bloc if there was a vote to leave, Mr. Osborne said. That comment prompted protests from opponents of European Union membership that Mr. Osborne had quoted selectively from the report.
Now, Mr. Osborne is highlighting the risks facing Britain’s recovery, emphasizing the fall in the price of oil and the slowing Chinese economy. Despite slower than expected growth, corporate tax rates will be cut to 17 percent by 2020.
But another of Britain’s difficulties is the self-inflicted economic uncertainty created by the June 23 vote on whether to stay in the European Union. Worries about a British exit from the 28-nation bloc are thought to be hitting investment and depressing growth, despite a fall in the value of the pound that ought to help exports. The amount that people can earn without paying taxes will rise, as will the earnings threshold that they need to cross before moving into a higher tax bracket.
There were also tax concessions for the struggling North Sea oil and gas industry and a freeze on taxes on fuel and many types of alcohol. The capital gains tax would be cut to 20 percent, from 28 percent.
Mr. Osborne missed one objective by failing to ensure that government debt would fall this year as a proportion of the country’s gross domestic product.
Jeremy Corbyn, leader of the opposition Labour Party, said on Wednesday that the budget had “unfairness at its very core” and that Mr. Osborne had “failed on the budget deficit, failed on debt, failed on investment, failed on productivity, failed on the trade deficit.”
Postponing further public spending cuts of 3.5 billion pounds, or $4.9 billion, until the fiscal period 2019-2020, Mr. Osborne remains on track to hit his target of a surplus by the end of the decade.
But in aiming to meet this objective “without squeezing the economy harder now, Mr. Osborne has backloaded the fiscal pain,” Ian Stewart, chief economist at Deloitte, the business advisory firm, said in a statement. As a result, Mr. Stewart said, the government would need to find spending cuts of £8 billion in 2019-20.
“Mr. Osborne is hoping that, in the run-up to the next general election, the U.K. will be better placed to cope with the squeeze needed to wipe out the deficit,’’ Mr. Stewart said.
“Hitting the government’s most important and most cherished fiscal target,” he added, “will need hard slog and luck.”