UK Chancellor George Osborne said he was determined to find £12 billion in welfare cuts in order to meet his strict fiscal targets during the current parliament.
The UK Chancellor George Osborne is presenting a so-called 'Summer Budget' on Wednesday, during which he will sketch the details of his plans on reducing fiscal deficit during the current parliament. A part of this aggressive public finances consolidation scheme is a marked trimming of as much as £12 billion from the welfare system over the coming two years, such as tax credits and housing benefit cuts.
"We have found that 12 billion pounds of savings in welfare that we said we'd be able to find ... We've got to have a welfare system that is fair to those who need it, but also fair to those who pay for it,"
Osborne told BBC Television on Sunday.
Osborne also argued he did not plan to push businesses into raising the minimum wage, while arguing tax cuts were a better way of boosting low wages: "The best answer is to cut people’s taxes and that is the most straightforward, Conservative way of doing this."
He also said wage growth had been picking up and the government had already announced it was going to raise the minimum wage as of October this year by 3% to a new rate of £6.70 per hour, which would be the largest real-term increase since 2008, and over 1.4 million of Britain’s lowest-paid workers are set to benefit.
New budget to echo Conservative Manifesto
The previous budget announcement held in March this year was prepared with the Liberal Democrats having their say in the Tory-led government. This time, the chancellor plans to hold the third, purely Conservative, budget due to the outright victory of the Conservatives in the May election.
Osborne's updated fiscal consolidation plans will most likely echo the Conservative Manifesto published ahead of the May election. In it, Osborne pledged a further £30 billion in spending cuts over the next two years. This would include £13 billion cuts in departmental spending, £12 billion savings from welfare, and at least £5 billion raised from tackling tax evasion, and aggressive tax avoidance.
The UK Treasury coffers have been guarded well since Osborne became chancellor back in May 2010. The Tory-led government has so far managed to squeeze public sector net borrowing by nearly one half since May 2010. It is now down by 41% in cash terms, and 51% down as a share of GDP relative to the post-crisis peak in 2009-10, according to the Office for Budget Responsibility (OBR). Ultra-accommodative monetary policy introduced by the BoE back in March 2009, which has been maintained all the way through until today, has partially helped to sustain growth under those strict fiscal adjustments.
According to the latest official figures, fiscal consolidation policies and increased tax receipts continued to help the Treasury coffers in May as the net borrowing excluding public sector banks came in at £10.1 billion, down £2.2 billion from the same month a year ago, and the lowest borrowing for the month of May in eight years. Despite concerns about softer growth not generating enough tax receipts, May's public finances got a healthy boost from increased VAT and income tax, rising 5.6% and 5.3% respectively.
New budget to soften UK monetary policy normalization
The Conservative government-planned sharp fiscal cuts in the UK public sector will also mean a more cautious path toward normalizing monetary policy and a longer-term drag on sterling. Fiscal policy matters a lot in setting out the future path for monetary policy. The more aggressive the cuts in the public sector in the UK, the longer it takes to move on toward a more normal monetary policy.
In his speech at the latest Inflation Report presser on May 13, Bank of England (BoE) Governor Mark Carney said that "the most important stance of policy in general, for monetary policy, over the monetary policy horizon, is the stance of fiscal policy. We take the stance of fiscal policy as given, and then we optimize monetary policy around that."
"There is persistent fiscal drag in this forecast, just as there has been over the last several years. That's one of the headwinds that weighs on the economy. It's one of the reasons why the path of Bank Rate, when it does rise, is likely to move at a gradual pace and to a limited extent," Carney said.
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