Chancellor 'ducking big decisions' as main measures delayed till after election

Published on Wednesday 9 December 2009 22:05

CHANCELLOR Alistair Darling has announced a pay squeeze for millions of public sector workers and a National Insurance hike as he tried to rebuild shattered public finances.

Delivering his Pre-Budget Report, Mr Darling said he would halve the ballooning 178 billion annual deficit over the next four years in an "orderly way" that would not threaten the recovery.

However, he was forced to concede that the recession in Britain was even deeper than previously thought, with the economy shrinking by 4.75 per cent this year compared with the 3.5 per cent he forecast in the Budget in April.

And he was accused by the opposition parties of having "ducked" the most difficult decisions, with billions of pounds in public spending cuts delayed until after the general election.

Unions reacted angrily to the news that, apart from the armed forces, public sector pay settlements would be capped at 1 per cent from 2011, while retail price inflation is set to hit 3.5 per cent.

Businesses, meanwhile, warned that the planned doubling of the increase in National Insurance contributions – from 0.5 per cent to 1 per cent – from April for employees, employers and the self-employed was effectively a "tax on jobs".

Apart from an immediate, one-off 50 per cent levy on bank bonuses over 25,000 and the planned restoration of the 17.5 per cent VAT rate, the main measures for tackling the deficit will not start to take effect until 2011.

Mr Darling told MPs that, while he was "confident" the economy would begin to grow again by "the turn of the year", confidence remained "fragile" and acting any earlier would risk pushing it back into recession.

"We must continue to support the economy until recovery is established. To cut support now could wreck the recovery – that's a risk I am not prepared to take," he said.

"When Japan tightened prematurely in the 1990s, it pushed the economy back into recession, making debt and deficits much higher, not lower."

He said that growth in public spending would be held to an average of 0.8 per cent per year, as the deficit was cut from 178bn this year to 82bn in 2014-15. "That will mean cuts to some budgets, as programmes come to an end or resources are switched to new priorities. And some programmes will need to be stopped altogether," he said.

However, the Chancellor said that, with the current "extraordinary uncertainties", it was "neither sensible nor necessary" to decide now where specific cuts would fall and so there would be no comprehensive spending review before next year's election. Instead, he said the government's priority was to protect front-line services in schools, hospitals and policing, but analysts warned that would simply mean more savage cuts elsewhere.

Mr Darling insisted he still believed the economy was on course to record growth of between 1 per cent and 1.5 per cent next year, before surging ahead to 3.5 per cent in 2011.

However, figures in the PBR "green book" showed that by 2014-15, the total public debt would have risen to 1.47 trillion – almost 78 per cent of the UK's national income.

Shadow chancellor George Osborne said Mr Darling's plans to restore the public finances lacked credibility.

"We were promised a Pre-Budget Report and what we got was a pre-election report," he said. "They have lost all the moral authority to govern today.

"Every family in the country is going to be forced to pay for years for this Prime Minister's mistakes."

Liberal Democrat Treasury spokesman Vince Cable said that Mr Darling's plans were built on "fanciful" forecasts for growth.

"What we needed was a national economic plan, but what we got was a weak party manifesto. The Chancellor has ducked the hard choices on spending and cuts," he said.

Earlier, there had been jeers from the opposition benches as Mr Darling claimed he was setting out his plans "from a position of strength".

As well as the curbs on public sector pay, the Chancellor announced that contributions from the state to the pensions of teachers, local government staff, health workers and civil servants would be also capped.

The senior civil service pay bill would be cut by up to 100 million over three years, with any new government appointment over 150,000 and all bonuses over 50,000 requiring Treasury approval.

Mr Darling was able to give Labour MPs something to cheer about with the announcement of an above-inflation 2.5 per cent increase in the state pension next year – and there was laughter when he followed that with a cut in bingo duty.

The Chancellor also confirmed a raft of heavily trailed green measures, including a scrappage scheme for inefficient boilers.

PRE-BUDGET REPORT: MORE REACTION

• Bill Jamieson: Broke, helpless Darling has run out of steam

• Chancellor 'ducking big decisions' as main measures delayed till after election

• Tax rises and pay caps but can it stop the rot?

• Windfall tax on bankers' bonuses labelled a drop in the ocean – but a blow to the City

• SNP claims spending delay will hit Scotland

• Gerri Peev: Blueprint for recovery looks more like a death certificate

• Sceptics claim failure to tackle public finance deficit outweighs plus points

• Analysis: Short-term political gains may not pay off in the long term