United Kingdom sees slower growth

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LONDON – Britain cut its economic growth forecast, on Wednesday, and said inflation would remain above target this year and next in a budget that stuck to ambitious deficit-busting goals. Seeking to support a faltering economy, Finance Minister George Osborne said corporation tax would be cut by two percentage points to 26 percent from April, rather than by just the one point originally planned. A levy on banks would be increased to help pay for it. Osborne also announced a surprise cut in fuel duty, while slapping higher charges on oil and gas production which he said would raise $3.3 billion.
He cut his growth forecasts to 1.7 percent in 2011, and 2.5 percent in 2012, citing figures from the government’s Office for Budget Responsibility (OBR) fiscal watchdog. In November, growth was estimated at 2.1 percent this year and 2.6 in 2012.
Sterling fell to the day’s low versus the dollar in response to the new economic forecasts while gilts pared gains on estimates that borrowing needs would decline more slowly than previously thought. The Conservative-Liberal Democrat coalition government is attempting to eliminate most of a deficit of 10 percent of national output before the 2015 election, while also nurturing a fragile economy back to health. It is cutting public spending by 81 billion pounds over the next four years, while already-announced tax rises will start to kick in from next month. Although borrowing would fall less steeply over the next four years, bulk of the budget deficit would still be eliminated by 2015, Osborne said.
“The OBR confirm that on their central forecast we will meet both these objectives – a balanced structural current budget and falling national debt by the end of the Parliament,” he said. The opposition Labour party, the unions and some economists argue the government is putting the recovery at risk by cutting the deficit so fast. “Growth down, last year, this year and next year. It’s the same old Tories (Conservatives): it’s hurting, but it isn’t working,” Labour leader Ed Miliband told parliament.
Policymakers at the Bank of England face a dilemma, with inflation running at more than double their two percent target while the economy is still in a fragile state. Minutes of this month’s Bank of England monetary policy meeting on Wednesday showed no more policymakers had joined the camp wanting to raise interest rates, with three out of nine MPC members backing a hike and the rest wanting to hold rates at a record low of 0.5 percent. Osborne said soaring oil prices meant inflation would remain between four and five percent this year before dropping to 2.5 percent next year. Economists said the government was banking on the economy rebounding strongly -growth in 2013 and 2014 was forecast at a heady 2.9 percent. “The borrowing numbers are a bit higher than expected and yet they’re still dependent on a pretty strong pick up in GDP growth in the next few years,” said Jonathan Loynes, economist at Capital Economics.
“I guess that suggests that the fiscal plans are vulnerable to weaker than expected outturns in the economy.” The economy unexpectedly shrank at the end of last year and, although it is seen bouncing back this year, the recovery faces headwinds from constrained credit, weak household finances, high oil prices and the prospect of tighter monetary policy. The coalition – which set a four-year plan to cut public spending by about a fifth last year – has little cash to spend. British fighter jets are now operating in Libyan skies to quell attacks by Muammar Gaddafi on his own people and sustained military engagement could put Britain’s cash-strapped armed forces under strain.