Chancellor of the Exchequer George Osborne said the forecast for U.K. economic growth this year was cut by half as he lowered corporation tax and set out an updated central-bank remit to aid Britain’s recovery.
Gross domestic product will increase 0.6% this year, compared with a previous forecast of 1.2%, Osborne told Parliament in London as he delivered his annual budget statement today, citing the Office for Budget Responsibility’s predictions. The economy will grow 1.8% next year, compared with a previous estimate of 2%, and it will expand 2.3% in 2015, he added.
“It is taking longer than anyone hoped, but we must hold to the right track,” Osborne told lawmakers. “The problems in Cyprus this week are further evidence that the crisis is not over, and the situation remains very worrying,” he said, referring to the uncertainty over a planned European Union rescue package for the Mediterranean island.
Prime Minister David Cameron’s Conservatives are trailing the Labour opposition in the polls as voters blame the government’s austerity package for a persistent economic slump. With Bank of England policy makers split on the need for more stimulus, Osborne handed them greater flexibility today to meet their inflation target while dealing with economic shocks.
The pound stayed higher after the chancellor’s speech, trading up 0.5% today at $1.5168 as of 2:43 p.m. in London. The yield on the 10-year gilt was up 4 basis points at 1.867%.
Osborne set out an “updated” Bank of England remit, which reaffirmed its 2% inflation goal. In a separate letter, he stated the central bank was correct to interpret this flexibly.
“The new remit explicitly tasks the MPC with setting out clearly the trade-offs it has made in deciding how long it will be before inflation returns to target,” Osborne told Parliament. “The new remit also recognizes that the Monetary Policy Committee may need to use unconventional monetary instruments to support the economy while keeping inflation stable.”
Recent data have fueled concern that Britain may be back in recession, after a 0.3% contraction in the final three months of 2012. Data today showed jobless claims fell less than economists forecast in February and a wider unemployment measure rose for the first time in a year as the number of young people seeking work climbed.
Osborne also warned that renewed turmoil in the euro area, Britain’s biggest export market, may hurt recovery prospects further.
“I will be straight with the country: another bout of economic storms in the euro zone would hit Britain’s economic fortunes hard again,” Osborne said.
Labour leader Ed Miliband attacked Osborne for imposing four more years of sacrifice on the country, rather than the one further year that had originally been planned.
“This is the chancellor’s fourth budget, but one thing unites them all,” Miliband said. “Every budget he brings to this house has been worse, not better, for the country. All he offers is more of the same. Higher borrowing and lower growth.”
The OBR today raised its deficit forecasts, citing weaker- than-expected tax income. Excluding the transfer of Royal Mail pension assets and payments of coupon income the Bank of England earns on its holdings of government bonds, the deficit will be 120.9 billion pounds ($183.4 billion) in the fiscal year that ends this month, 1 billion pounds higher than it previously forecast.
Over the five fiscal years starting in April, the deficit will total 434 billion pounds, 55.7 billion pounds higher than forecast in December. It means net borrowing will fall from 7.8% of GDP in the current fiscal year to 2.3% of GDP in 2017-18, the OBR said. The structural deficit, currently 4% of GDP, will be eliminated by 2016-17.
The OBR also expects net debt to begin falling in 2017-18, a year later than planned. It’s the second time the debt target has slipped. Net debt will peak at 85.6% of GDP in 2016- 17. The OBR previously put the peak at 79.9% of GDP in 2015-16.
Osborne said corporation tax will be reduced by 1 percentage point to 20% starting in April 2015.
“I want us to send a message to anyone who wants to invest here, to create jobs here, that Britain is open for business,” the chancellor said. “Britain will have a 20% rate of corporation tax -- the lowest business tax of any major economy in the world.”
The U.K.’s levy on banks will be increased for a sixth time to 0.142%, he said. In an effort to boost hiring, Osborne also announced a new Employment Allowance. It will take the first 2,000 pounds off the social-security contributions that companies pay. The measure, which takes effect in April next year, will cost the Treasury 1.7 billion pounds by 2017.
Osborne also said he will raise the personal tax-free allowance on salaries to an annual 10,000 pounds, a key demand of his Conservative Party’s Liberal Democrat coalition partners, starting next year. The move means that “almost 3 million more of the lowest paid will pay no income tax at all,” he said.
The government will also scrap a planned increase on duty on motor fuel, which had been scheduled for September.
“Today, I am canceling this September’s fuel-duty increase altogether,” Osborne said. “Petrol will now be 13 pence per liter cheaper than if we had not acted over these last two years to freeze fuel duty.”
Further measures announced today include help for new home buyers, with the government pledging to commit 3.5 billion pounds to offer and guarantee loans. Osborne said that under the “Help to Buy” program, the government will provide an equity loan of up to 20% of the value of a newly built home.