British budget extends austerity, cuts growth outlook

LONDON — Britain unleashed more austerity this week in its latest annual budget and cut its growth outlook, blaming the impact of global markets turbulence rooted in China. 

Finance Minister George Osborne also warned that a potential “Brexit”, or departure from the European Union (EU), would risk damaging the nation's economic recovery, ahead of a key referendum in June.

Chancellor of the Exchequer Osborne said the government would seek additional spending cuts totalling £3.5 billion ($5 billion, 4.5 billion euros) by 2020, when it expects to reach a budget surplus despite higher borrowing.

The chancellor pointed to a "dangerous cocktail of risks" including "turbulence in financial markets, slower growth in economies like China, and weak growth in the developed world" for the growth downgrades.

Analysts were meanwhile quick to point out that it was not clear which areas would bear the brunt of the latest cuts. 

"How these cuts will be made has not been outlined other than described rather vaguely as savings," said ING economist James Knightley. "With [government] department budgets already having been cut aggressively it will be interesting to see where new efficiency savings can be made."

In a speech lasting around one hour, Osborne forecast that the British economy was set to grow by 2 per cent this year, down from a November estimate of 2.4 per cent.

Growth was expected to stand at 2.2 per cent next year, down from 2.5 per cent.

Fiscal watchdog the Office for Budget Responsibility (OBR), which compiles official government forecasts, said the latest predictions were based on the assumption that Britain remained in the EU.

Osborne, a top figure in Prime Minister David Cameron's Conservative Party and government, also revealed plans to cut several taxes levied on businesses amid strongly divergent views from companies on whether Britain should quit the EU.

"This is a budget for small businesses," Osborne told lawmakers.

There were also significant tax cuts for the oil and gas industry, which has been hit by tumbling energy prices.

All eyes on Brexit vote 

Turning to Britain's June 23 referendum on EU membership, Osborne repeated the government's strong desire for the UK to stay within the 28-nation trading bloc.

"Britain will be stronger, safer and better off inside a reformed EU — and I believe we should not put at risk all the hard work the British people have done to make our economy strong again," Osborne told parliament.

Cameron is leading the battle to keep Britain in the EU, but several key members of his Conservative party, notably Mayor of London Boris Johnson, want to leave.

"There appears to be a greater consensus that a vote to leave would result in a period of potentially disruptive uncertainty while the precise details of the UK's new relationship with the EU were negotiated," the OBR said Wednesday, citing various external reports.

The government will meanwhile plough more cash into education and infrastructure projects. 

Osborne approved major railway developments in northern England and in London, and also unveiled a package of extra funding for education, which could see students being made to learn maths until the age of 18, up from 16.

In addition, Britain will impose a tax on excessive sugar levels in soft drinks starting in two years' time to cut down on spiralling childhood obesity levels.

With one eye on the referendum outcome, Osborne avoided traditionally unpopular vote-losing measures, like tax hikes on petrol and beer, and delivered only a very slight increase for tobacco.

"The chancellor had to tread carefully to avoid attracting the wrong kind of attention and undermining the government's popularity in the build up to the EU referendum," noted Scotiabank economist Alan Clarke.

Osborne on Thursday defended his plans to introduce a new sugar tax to tackle obesity, criticised as "absurd" by the soft drinks industry.

"There are always going to be people who will oppose these kinds of things — but I think this is going to be one of those landmark public health decisions that we take as a generation," Osborne told ITV News.

"It's disappointing that the government has chosen to single out soft drinks," said Jon Woods, general manager of Coca-Cola in Britain.

"If the aim is to reduce obesity, this levy flies in the face of evidence from around the world which shows taxes do very little, if anything, to reduce sugar and calorie intake or obesity levels but do add to people's cost of living," he added.

The levy on drinks with more than five grammes of sugar per 100 millilitres will be introduced in two years as Britain battles some of the worst obesity rates in Europe.

Only a handful of countries such as France, South Africa and Mexico have attempted such a tax. 

Osborne said Britain's childhood obesity problem was "really bad news", and that it was "clearer and clearer that the biggest source of sugar intake has been sugary drinks".

However, the drinks industry said it was already taking action to combat obesity and that other food-and-drink sectors needed to help shoulder the burden.

"In 2015 we agreed a calorie reduction goal of 20 per cent by 2020," said British Soft Drinks Association Director General Gavin Partington.

"By contrast, sugar and calorie intake from all other major take-home food categories is increasing — which makes the targeting of soft drinks simply absurd," he added.

According to 2015 figures, Britain is one of the worst countries in Europe for childhood obesity with 28 per cent of children aged between two and 15 overweight or obese. 

During his budget announcement, Osborne said that an average five-year-old child consumes his own body weight in sugar each year.

"We are going to use the money to double the amount we spend on sports in schools... so that kids are getting physical activity as well," he said Thursday.

Media reports suggest the tax could add 8p (0.10 euros, $0.11) to a can of cola. 

The government hopes the tax will raise £520 million a year (661 million euros, $732 million).

Osborne also unveiled new measures to raise taxes paid in the country by multinational companies, following a public outcry over methods used to avoid tax.

While corporation tax will drop from 20 per cent to 17 per cent in 2020, the finance minister set out a series of measures he said would increase British tax revenues by 9 billion pounds ($12.8 billion, 11.5 billion euro).

He added that the plan would "make Britain's business tax system fit for the future".

"It will deliver a low tax regime that will attract the multinational businesses we want to see in Britain, but ensure that they pay taxes here too," Osborne told the lower house of parliament.

"All of these reforms to corporation tax will help create a modern tax code that better reflects the reality of the global economy," he elaborated.

From April 2017, there will be a cap for the amount that major multinationals can deduct from their taxes by borrowing in Britain to invest elsewhere.

The treasury will also set new "rules to stop the complex structures that allow some multinationals to avoid paying any tax anywhere, or to deduct the same expenses in more than one country," Osborne said.

He added that the treasury would strengthen a withholding tax on royalty payments that allow some firms to shift money elsewhere.

There has been public outrage in Britain and other countries around the world over the tax arrangements of multinationals, particularly in the tech industry.

Earlier this year, US internet giant Google agreed to pay £130 million ($185.4 million, 172 million euros) to Britain following a government inquiry into its tax arrangement.

In early March, Facebook announced that it would declare advertising revenue from its top British clients in Britain instead of Ireland, where it has its European headquarters, meaning it should pay more tax.

There had been a backlash against the social network after it emerged that it paid only £4,327 (5,572 euros, $6,119) in corporate tax in 2014.

Osborne said the measures followed guidelines set out by the Organisation for Economic Cooperation and Development (OECD) economic grouping last year.

The OECD has estimated that national governments lose $100-240 billion (90-210 billion euros), or four to 10 per cent of global tax revenues, every year due to the tax-minimising schemes of multinationals.