Unbowed by criticism, Osborne announces new govt cuts
Move part of ambitious plan to turn UK’s deficit into surplus by 2020
LONDON, Nov 9, (RTRS): British finance minister George Osborne announced on Monday a wide-ranging set of government spending cuts as part of his ambitious plan to turn Britain’s deficit into a surplus by 2020.
The transport, environment, local government and finance departments will have their day-to-day budgets, excluding capital expenditure, cut by an average of 8 percent each year for the next four years, Osborne said.
Osborne, considered the frontrunner to succeed Prime Minister David Cameron, is seeking to shore up his credentials as someone who can deliver his Conservative Party’s vision of a smaller state after an embarrassing parliamentary defeat on welfare cuts last month.
Britain’s economy has returned to growth under Osborne, but his critics accuse him of crimping its recovery with spending cuts. They also point out he failed to meet his original target to eliminate the deficit by 2015.
In his speech on Monday, Osborne hit back at those critics, adopting an unapologetic stance over spending cuts.
“If our country doesn’t bring the deficit down, the deficit could bring our country down,” he said. “That’s why, for the economic security of every family in Britain, the worst thing we could do now as a country is lose our nerve.”
Britain’s deficit was 4.9 percent of GDP in the 2014/15 financial year — still one of the highest among advanced economies.
“(Osborne’s) record to date is a disappointing one of cutting investment to the lowest of any developed economy, and the slowest economic recovery on record,” said the opposition Labour Party’s finance spokesman, McDonnell.
The Treasury did not place a value on the latest cuts, but the four departments involved account for around 22.5 billion pounds of the government’s 337 billion day-to-day spending.
They amount to a 30 percent spending reduction by 2020 and come after five years of austerity that has already seen some departmental budgets cut by more than half.
The cuts will be confirmed in a Nov 25 spending review, which the government has said will set out a total of 20 billion pounds of reductions in departmental spending by 2020. Health, education and defence are largely protected.
In July, Osborne said he was targeting a 10 billion-pound surplus in 2020 by cutting 20 billion pounds from departmental budgets, saving 12 billion pounds on welfare spending and recouping 5 billion by reducing tax avoidance.
Osborne said on Monday that he was still determined to deliver a surplus. But he refused to confirm whether the next set of independent budget forecasts, also due on Nov 25, would still predict the same 10 billion-pound figure.
“It wouldn’t be right for me to try and anticipate those numbers,” he said. “A lot can happen over the coming years, and these forecasts move around, so that’s why I think you want a reasonably comfortable margin in delivering the surplus.”
He said his Nov 25 budget update would include savings larger than were previously estimated, by addressing “avoidance, evasion and imbalances in our tax system.”
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Mark Carney, chairman of the Financial Stability Board (FSB) that coordinates regulation across the Group of 20 economies (G20) to plug gaps highlighted by the 2007-09 financial crisis, said many of the key reforms have been implemented decisively and promptly.
“As a consequence, the financing capacity to the real economy is being rebuilt and significant retrenchment from international activity has been avoided,” Carney said in a letter to G20 leaders ahead of their summit next week.
The G20 tasked the FSB in 2009 with introducing a welter of reforms from increasing bank capital requirements to shining a light on derivatives markets and curbing bankers’ bonuses.
Carney, who is also Governor of the Bank of England, said the board has now finalised the tools needed to wind down “too big to fail” banks in an orderly way if necessary, seen as the last major financial reform of the crisis.
G20 leaders meeting next week in Turkey will be asked to endorse a reform that requires the world’s 30 top banks to issue a buffer of bonds by 2022 that can be written down to raise funds equivalent to 18 percent of risk-weighted assets, if the lender goes bust.
The aim of the buffer, known as total loss-absorbing capacity or TLAC, is to allow a big bank to fail without creating the kind of mayhem in markets seen after Lehman Brothers bank went bust in 2008.
Under the worse case scenario, the banks would have to issue a total of 1.1 trillion euros ($1.18 trillion) in bonds. The bulk of this, or 755 billion euros, would be in China and other emerging markets whose banks have been given and extra six years until 2028 to comply with TLAC, the FSB said.
Banks could also plug the shortfall by issuing shares or retaining earnings.
“It is clear the benefits far exceed the costs of introducing this standard,” Carney said.
Citi bank analysts said the requirement will be manageable for European banks, with an estimated average 2 percent earnings hit in 2017, rising to 4-5 percent for Unicredit, Santander and BNP Paribas.
Banks moved early to meet tougher capital requirements since the crisis to reassure investors about their solvency. But Svein Andresen, FSB secretary-general, said he does not expect banks to necessarily rush headlong to meet TLAC rules early.
“Many banks have told us they will let existing liabilities run off and replace them in the course of normal refinancing,” Andresen said.
Some of the banks like Bank of America, UBS, Credit Suisse and Citi have already said they already meet or will comfortably meet the TLAC rules.
The Swiss finance ministry said on Monday that the new rules it outlined last month would comprehensively meet TLAC standards and in parts exceed the minimum requirements of international standards.
Last month the Federal Reserve published rules to apply a TLAC-style rule on the biggest US banks who would need to raise an additional $120 billion in long-term debt.