Coalition to spell out spending review plans

 

The UK's coalition government will Tuesday spell out how it will conduct this year's spending review as it prepares the public sector for big cuts in funding to help tame a record budget deficit.

Conservative chancellor George Osborne and his Liberal Democrat deputy Danny Alexander will announce the framework to parliament two weeks before the coalition outlines the scale of fiscal tightening required in an emergency budget.

Ratings agency Fitch said Tuesday the fiscal challenge facing Britain was formidable and would require a faster pace of austerity than planned by Labour, which lost power in May. The comments sent sterling lower against the euro and the dollar.

The spending review is likely to include a "star chamber" of key ministers and top officials which would look at departmental spending cuts and the coalition also wants to bring in opinion from the public, trade unions and the private sector.

"The process is beginning and ministers are very clear that they are going to have to find savings" Prime Minister David Cameron's spokesman told reporters.

"Successful consolidations tend to be in areas where the bulk of the consolidation comes from the spending side."

The budget deficit is close to 11 percent of national output and the new administration, wary of contagion spreading from the euro zone debt crisis, wants to take tough action to keep borrowing costs low and maintain investor confidence.

Executing such a painful deficit plan is likely to involve heavy job losses and pay restraint in the public sector and seems bound to trigger union unrest at a time when Britain's economy is emerging from its worst recession since the Second World War.

The debate over where to cut - the coalition wants much of the deficit reduction to be carried out through slashing spending rather than tax hikes - could also create tension and reveal cracks in the fledgling coalition government.

FITCH CONCERNS

Speaking to cabinet, Osborne cited independent forecasts - based on the previous Labour government's plans - of cuts of 15-20 percent in non-protected areas of spending. The coalition wants to protect fewer areas while cutting the deficit faster.

Labour says too severe a fiscal tightening could put Britain's frail economic recovery at risk, arguing that the Conservatives are using the need for deficit reduction as cover to implement their ideological desire to shrink the state.

"The important thing on growth is that we get a sustained private sector recovery" the spokesman for Conservative Cameron said. "And dealing with the deficit will allow interest rates to stay lower for longer."

However, citing the likelihood of tax cuts in some areas and lower economic growth forecasts, Fitch appeared to question the ambition of loading the bulk of tightening on spending cuts.

"A more ambitious deficit reduction path ... would help in going some way to restoring 'fiscal space', or a cushion against future shocks" Fitch said.

"Achieving such a path purely on the basis of further spending cuts would imply unprecedented real declines in primary spending."