Britain braces for toughest budget in a generation

REUTERS - British finance minister George Osborne will announce on Tuesday swinging spending cuts and tax rises in what will be the tightest budget in a generation and the first big test for the coalition government.
 
Nearly one million of the lowest-paid people are expected to be taken out of paying income tax at a cost of 3.7 billion pounds ($5.7 billion) in a move that will please the Liberal Democrats, the junior coalition partner.
 
Osborne is also expected to announce a new annual tax on banks in a budget he will bill as fair and progressive, with the cost of bringing down a record peacetime deficit borne right across society.
 
In opposition, Osborne, a Conservative, said he expected the bank levy would raise around 1 billion pounds but his Liberal Democrat coalition partners favoured a much bigger take of perhaps 4 to 5 billion pounds.
 
As a sovereign debt crisis has rippled through Europe, rating agencies have warned Britain's triple-A status could be at risk if the 39-year old Chancellor of the Exchequer's plans to cut the record deficit are found wanting.
 
But many economists are also concerned tightening policy too fast right now could plunge Britain back into recession. The budget deficit is running at close to 11 percent of national output, not far short of levels in crisis-hit Greece.
 
Osborne's view is there is no time to waste following a May election at which the Conservatives and smaller Liberal Democrats took power in coalition -- a rarity in Britain.
 
Britain is cutting despite U.S. President Barack Obama's warning about the perils of withdrawing stimulus too soon.
 
"While an improved fiscal position will improve the economy's long-run prospects, we remain certain that the consolidation itself will act as a major drag on the economy
over the next few years," said Jonathan Loynes of Capital Economics.
 
The finance minister has said he will slap a new tax on banks, raise capital gains tax, freeze public pay, examine savings in the welfare system and take an axe to spending on top of the hefty tightening announced by the previous government.
 
Speculation is also rampant that VAT sales tax will go up to 20 percent from 17.5 but the personal allowance -- income on which no tax is paid -- is expected to be raised by some 1,000 pounds taking 880,000 people out of the tax net.
 
There is a possibility the headline rate of corporation tax will fall, although this would be offset by savings elsewhere.
 
Twin themes

Treasury sources say the budget will have two main themes.

The first is being honest about the size of the problem and a second more optimistic one about it being a starting point for unleashing a wave of private sector enterprise and growth.
 
The government will also publish a distributional analysis of the budget for the first time in an effort to show it is "progressive" and which should reveal a flattish profile with the rich being slightly harder hit.
 
The coalition has already announced 6 billion pounds worth of spending cuts since taking office.