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Osborne details spending cuts of £6.2 billion

Source: Reuters - Mon 24th May 2010

Chancellor George Osborne announced details of spending cuts worth 6.2 billion pounds on Monday and warned that much worse lay ahead in his emergency budget next month.

Analysts said the cuts - which were largely as expected - were a useful downpayment on tackling the record budget deficit but a much bigger fiscal tightening would still be needed to safeguard Britain's triple-A credit rating.

But unions said the cuts would hit services, damage the economy and put thousands of jobs at risk.

Osborne said urgent action was needed and the new Conservative/Liberal Democrat coalition government, in office for less than 2 weeks, would not shirk from its top priority of cutting the deficit, running at close to 11 percent of GDP.

"This is the first time this government has announced difficult decisions on spending. It will not be the last" said Osborne at a news conference flanked by his LibDem deputy David Laws.

The Conservatives had pledged before the May 6 election to start spending cuts in the current fiscal year. The LibDems had said such a move would endanger the recovery but have now signed on to the immediate cuts.

"The years of public sector plenty are over. But the more decisively we act, the more quickly and strongly we can come through these tough times" said Laws.


In a concession to the LibDems, 500 million pounds of the 6.2 billion pounds in spending cuts will be reinvested into further education and social housing.

But the rest would be used to bring down the deficit. Government advisory bodies - known as "quangos" - would lose 513 million pounds in funding. There would be a hiring freeze across the civil service and almost all departments would have to find savings.

For example, the business ministry will have its budget cut by more 800 million pounds.

"The new government deserves credit for identifying these cuts on a department-by-department basis in the space of less than 2 weeks" said Hetal Mehta, Senior Economic Advisor to the Ernst & Young ITEM Club.

"But we must remember that 6 billion pounds is still a drop in the ocean compared with the scale of tightening that will be required over the course of the parliament. The emergency Budget and the subsequent Comprehensive Spending Review remain the crucial junctures for assessing how credible the deficit reduction programme will be."

While the task ahead is clearly massive, figures released last week suggested that at least the worst may be over for public finances with tax receipts up sharply.

Borrowing for 2009/10 was revised lower by 7.5 billion pounds. Excluding the financial sector interventions, it stood at 156.1 billion pounds, some 10 billion pounds lower than predicted in the budget in March.

But there is no getting away from the fact government spending will have to come down significantly, putting the coalition on a collision course with increasingly militant unions.

"We do not accept that huge spending cuts are necessary or desirable, and we do not believe it is credible for the government to say it can protect public sector jobs and services while taking the axe to departments in this way" said Public and Commercial Services Union general secretary Mark Serwotka.

Bank of England Monetary Policy Committee member Kate Barker said she thought extra fiscal tightening would act as a headwind to growth but that markets might take fright if nothing was done to bring down the deficit.

"So it is very important that the package (June 22 budget) that's produced is something which is going to avoid further rises in gilt yields. And this tells us that fiscal policy faces some really very difficult choices" Barker told the Financial Times in an interview published on Monday.

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