British chancellor George Osborne today unveiled £6.25 billion (€7.26 billion) of spending cuts and warned much worse lay ahead in an emergency budget next month.
Analysts said the cuts, which were largely as expected, were a useful downpayment on tackling the record budget deficit but would be dwarfed by additional austerity measures that would be needed to safeguard Britain's triple-A credit rating.
The savings were based on “strong economic advice” from the Bank of England and the Treasury in favour of “early action to deal with our debt”, the Chancellor said. It reflected a “decisive shift” around the world towards deficit reduction as a priority.
The cuts are in line with promises made by Mr Osborne before this month's election.
Mr Osborne's deputy David Laws warned the cuts were intended to "send a shockwave through government departments", and unions said they would hit services, damage the economy and put thousands of jobs at risk.
Given some breathing room by debt figures for 2009/10 that undercut estimates, Mr Osborne said the new Conservative-Liberal Democrat coalition government, in office for less than two weeks, would not shirk from its top priority of cutting the deficit, running at close to 11 per cent of GDP.
Britain's announcement comes on the heels of emergency austerity measures in other European Union countries weighed down by hefty deficits, including Spain and Portugal, as governments look to prevent a debt crisis from spreading beyond Greece. Italy's cabinet meets to approve deficit-cutting measures tomorrow.
"This is the first time this government has announced difficult decisions on spending. It will not be the last," Mr Osborne said at a news conference flanked by Mr Laws.
The Conservative Party had pledged before the May 6th election to start spending cuts in the current fiscal year. The Lib Dems had said such a move would endanger the recovery but have now signed up to the immediate cuts.
"This action is designed to send a shock-wave through government departments, to focus ministers and civil servants on whether spending in these areas is really a priority in the difficult times we are now facing," said Mr Laws.
"... 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."
In a concession to the Lib Dems, £500 million of the £6.2 billion in reductions will be reinvested in further education and social housing. But the rest would be used to bring down the deficit. Mr Osborne said the savings would include over £1 billion of “discretionary” spending such as consultancy and travel, nearly £2 billion from IT programmes, suppliers and property and more than £500 million from cutting “low-value spending”.
Government "quangos" would lose £513 million in funding. There would be a hiring freeze across the civil service and almost all departments would have to find savings. The Treasury, for example, will have its budget cut by more £800 million.
Mr Osborne has promised an emergency budget on June 22nd when he is likely to announce more significant spending cuts and perhaps tax rises in order to convince markets that Britain is serious about getting government borrowing down.
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. Excluding financial sector interventions, it stood at £156.1 billion, some £10 billion pounds lower than predicted in the budget in March.
But there is no escaping 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.
Agencies