UK austerity measures raise VAT and cut public services

Government departments ordered to slash budgets by a quarter, which labour unions fear will cut jobs and stall fragile recovery.

LONDON // George Osborne, the UK chancellor of the exchequer, took the axe to public spending today, cutting billions in the new coalition government's emergency budget. Seven weeks after taking office, Mr Osborne announced that he was also increasing the government's VAT sales tax to 20 per cent from January and ordered all civil service departments, except for health and overseas aid, to cut spending by 25 per cent over the next four years - a move that the unions predicted would cost 750,000 jobs.

Rejecting warnings from Labour Party politicians that cutting too far could irreparably damage the fragile economic recovery, Mr Osborne announced a plan to cut £11 billion (Dh59.8bn) from welfare spending over the next five years. Child benefits will be frozen for three years, families earning more than £40,000 will see their tax credits cut, housing benefits will be capped and everyone claiming disability will have to undergo strict new medicals from 2013. One measure that could impact British expatriates is a decision to raise capital gains tax, paid on sales of shares or second homes, from 18 per cent to 28 per cent for higher rate taxpayers. Additionally, there will be a two-year pay freeze for millions of public sector workers and an acceleration in the move to increase the state pension age from 65 to 66. Harriet Harman, acting as the Labour leader since Gordon Brown's resignation following his party's election defeat last month, said the budget would "throw people out of work, hold back economic growth and harm vital public services". The chancellor in the Conservative-Liberal Democrat government conceded that growth would be affected and the Office for Budget Responsibility subsequently reduced its forecast slightly for both this year and next. Promising to wipe out the UK's record deficit by 2016, Mr Osborne accepted that the budget was a painful one, but added: "The years of debt and spending make this unavoidable. Yes, it is tough, but it is fair."