–UK Treasury Unveils Total stg6.2bn In Spending Cuts
–Stg5.7 bln Will Go On Reducing Deficit – 0.4% Of GDP
–UK Tsy Laws: BOE King Says Deficit Cuts Will Help Keep Rates Low

London (MNI) – UK Chancellor of the Exchequer George Osborne
unveiled Monday the details of the first instalment of the promised
public spending cuts from the new Conservative/Liberal Democrat
government, although the amounts involved are small in comparison
to the sheer size of the deficit.

Osborne, and Chief Secretary to the Treasury David Laws, announced
stg6.2 billion of spending cuts, but with stg500 million of this being
recycled into priority spending areas, the amount set aside for deficit
reduction is just stg5.7 billion.

Analysts pointed out it is a small first step in deficit reduction,
equivalent to just 0.4% of GDP. The Treasury’s most recent estimate was
the UK deficit, under the Maastricht definition, would amount to 11.2%
of GDP in this 2010/11 fiscal year.

The measures come ahead of the June 22 budget, which will set out a
far wider ranging set of deficit reduction measures, and a new set of
fiscal forecasts.

Laws acknowledged the cuts unveiled Monday were only a first step
on the deficit reduction road.

“These are only the first steps which we will need to take in order
to put our public finances back in shape. There will be many more tough
decisions,” Laws said.

Osborne cited the recent comments of Bank of England Governor
Mervyn King in favour of early action on deficit reduction.

King, at the BOE’s May Inflation Report press conference, said “It
is essential to take measures this fiscal year to demonstrate the
determination of the new Government”.

Osborne believes tightening fiscal policy will result in monetary
policy remaining looser for longer.

“We need to take urgent action (on deficit reduction) to keep our
interest rates lower for longer, to boost confidence in the economy and
protect jobs,” he said.

He said countries around the world “are waking up to the dangers of
a sovereign debt crisis and taking action to live within their means”
and said the UK would become a “leading voice” in Europe calling for
fiscal responsibility.

The cost-cutting measures set out were described by their
architects as steps to eliminate waste, with schools and health sector
spending protected, and some of the spending cuts had a populist tinge.

They comprised stg1.15 billion in cuts in discretionary areas,
such as public sector consultancy and travel costs. Among the cost
cutting on travel spending were steps to reduce first class travel by
government ministers, with the ministers also committed to car pooling.

Other big ticket spending cuts were stg1.7 billion in delaying and
stopping contracts and projects signed under the previous Labour
administration. There will also be cuts of stg1.165 billion to local
government grants.

Laws argued that as the cuts were reductions in departmental and
local government budgets, they were real reductions.

Government officials, however, refused to say how many jobs would
be lost as a result of the cuts.

Osborne talked about not rehiring for vacant public service
positions and said “the objective here is to get the economy growing and
reduce unemployment.”

Laws said it was not possible to put a figure on job losses, adding
“most of the (job) reduction will come through the recruitment freeze
that we have put in place.”

The deficit reductions measures have re-triggered the war of words
between deficit doves and hawks.

Former BOE Monetary Policy Committee member David Blanchflower in a
BBC radio interview said deficit cutting at a time of weak growth “seems
to me to be really pushing us towards the death spiral” – reciting the
familiar argument of lower public spending leading to lower growth and
requiring yet bigger cuts to reduce the deficit as a share of GDP.

On the other side of the argument is King’s, that taking early
action on the deficit reduces the “downside risks that might have been
there because of the possibility of an adverse market reaction, which
would have increased the cost of funding government debt.”

The Greek debacle and increased market risks were cited by Laws in
support of pressing ahead with deficit reduction, along with the
support of King.

Laws cited two offsetting factors from deficit reduction that will
cushion the impact on jobs.

One was that “the Governor of the Bank of England has said that by
taking this action to reduce the deficit it will be easier for him to
keep interest rates low” and the second was part of the reduction will
be used to avert a planned hike on employers’ national insurance – the
so called “jobs tax”.

–London newsroom: 4420 7862 7491 email: drobinson@marketnews.com

[TOPICS: MABDS$,M$B$$$,MT$$$$]