Britain's $45b stimulus

The Straits Times
Nov 25, 2008 | 6:00AM
Britain's $45b stimulus
Britain fights recession with huge stimulus package.

LONDON - BRITAIN unveiled a major economic stimulus package worth 20 billion pounds (S$45.8 billion) on Monday to reignite consumer spending and help the nation recover from a deep and painful recession expected next year.

Chancellor of the Exchequer Alistair Darling said he would cut tax on goods and services and would fund the plan by borrowing more and raising income tax on the wealthy from 2011.

In a pre-budget report, Mr Darling also warned Britain's economy would shrink in 2009 and would not recover until 2010, but said the downturn would be softened by his 'wide-ranging' stimulus measures.

'While clear risks remain, particularly relating to prospects for credit conditions easing, the downturn will be shallower and shorter than would have been the case in the absence of fiscal support,' Mr Darling said.

He also brought forward major public spending projects - such as motorway upgrades, school refurbishments and repairs to public housing - worth 3.0 billion pounds.

Investors applauded the cash bonanza, sending the London stock exchange's blue-chip FTSE 100 index up 9.84 per cent - its biggest-ever one-day gain - to close at 4,152.96 points.

The stimulus package followed calls from Prime Minister Gordon Brown - who as Mr Darling's predecessor oversaw Britain's longest-ever run of prosperity - for governments around the world to cut taxes and increase public spending.

Britain stands on the verge of recession after its economy shrank in the third quarter - slammed by the global credit crunch, a slumping property market and chaos on world financial markets.

'I will do whatever it takes to support people through these difficult times,' Mr Darling told parliament.

'That is why my pre-budget report today contains a substantial fiscal loosening to help the economy now, with a 20-billion-pound fiscal stimulus between now and April 2010.' The package totalled around one per cent of Britain's total gross domestic product (GDP), he added.

Warning that the economy might not recover before 2010. Mr Darling said the Labour government was acting now 'to help us emerge quicker and emerge stronger from these difficult times.' He forecast the economy to shrink by 0.75-1.25 per cent in 2009 - a major downgrade from his March estimate of 2.25-2.75 per cent - before rebounding with growth of 1.5-2.0 per cent in 2010.

'The United Kingdom is the world's leading financial centre, but because of the size of the financial sector, we are likely to be affected more directly by a global financial recession,' he said.

Turning to tax cuts, Mr Darling said he would slash sales tax, or value-added tax (VAT), on goods and services from 17.5 per cent to 15 per cent in a temporary move beginning on Dec 1. VAT will return to its current level in 2010.

This is equivalent to giving consumers 12.5 billion pounds, he said.

The Labour government will also lift the highest rate of income tax to 45 per cent from 40 per cent, he said.

However, the new band will not be introduced until 2011, a year after Britain's next general election is due, and will only apply to individuals earning above 150,000 pounds a year.

The stimulus package will also be funded by a hefty increase in state borrowing, to 78 billion pounds in the current financial year and then 118 billion pounds in 2009-2010.

Debt as a share of GDP would increase to 48 per cent in 2009-2010, before peaking at 57 per cent in 2013-2014.

The main opposition Conservatives warned Mr Darling was storing up more trouble because taxes would rise in the future to pay for the plan.

He had 'placed a huge unexploded tax bombshell timed to go off under the future economic recovery', Tory finance spokesman George Osborne said. 'This isn't just a bombshell,' he said. 'It is a precision-guided missile at the heart of a recovery.'

Mr Howard Archer, an economist at IHS Global Insight, said the cost was probably justified.

'There is the very real danger that the (economic) recovery will start much later and from a much worse position unless serious fiscal stimulus is delivered now in tandem with sharply lower interest rates,' he said. -- AFP