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Osborne promises 'tough but fair' budget

By Channel 4 News

Updated on 20 June 2010

Britain will be on "the road to ruin" without cuts and tax rises in Tuesday's budget, warns Chancellor George Osborne. Channel 4 News business correspondent Siobhan Kennedy predicts the measures will hit benefit claimants, middle-income earners - and highly paid bankers.

Chancellor George Osborne, speaking on BBC 1's The Andrew Marr Show

On Tuesday George Osborne will unveil what are expected to be the toughest set of economic measures for decades in a bid to tackle the UK's deficit.

He told the BBC's Andrew Marr a harsh budget was inevitable, given the state of the nation's finances, but he pledged they would be "tough… but fair".

And he urged voters to judge the budget according to its long-term benefits, not on the immediate pain it would cause.

"As a new government, we have inherited a truly awful financial situation," he said. "No incoming chancellor has ever faced a set of public finances like this."

He continued: "We sit here as the country in Europe with the largest budget deficit of any major economy, at a time when markets and investors and businesses look around the world at countries that can't control their debts.

"We have got to deal with that. In that sense, it is an unavoidable budget."

Crackdown on the welfare state - and on bankers
People who rely on benefits because they cannot find work will face much tougher tests and government scrutiny in one of the biggest crackdowns on the welfare state to be announced in a generation, writes Channel 4 News business correspondent Siobhan Kennedy.

Treasury sources told Channel 4 News that George Osborne's emergency budget on Tuesday would include tough new checks targeted at the five million people who are able to work but who do not and instead live on benefits, such as disability and incapacity payments, for extended periods of time.

"We'll step up the level of checks, make tougher tests and where there are no tests currently, we will introduce them," a Treasury aide said.

The aim is to radically reduce the £180bn a year welfare bill and funnel the money instead towards paying down Britain's £156bn budget deficit.

The Treasury will also target those middle income families - with household incomes of £30,000 and above - who currently qualify for child benefit, tax credits and in some cases housing benefit.

The Chancellor believes that in many instances these types of benefits have historically "gone quite a long way up the income ladder", the Treasury aide said, and in times of belt-tightening, they should be axed.

Osborne plans to announce the first part of the shake-up to the welfare system on Tuesday, the Treasury aide said, with further overhauls to be unveiled in the autumn at the spending review.

But as well as cuts, there will also be tax increases. Osborne today refused to be drawn on whether or not that includes a rise in VAT. But he did outline an annual levy to be imposed on the banks that sources say could generate as much as £3bn.

There will also be the controversial increase to capital gains tax, or the tax paid when an asset such as a house or a business is sold. The Treasury source said Osborne was particularly targeting highly paid bankers and private financiers who exploit loopholes in the system.

But the measure will also hurt thousands of people who bought second homes in the property boom, although the chancellor is expected to include some form of taper relief, or exemption, to reduce their pain. "The most egregious example is the rich banker who pays less tax than his cleaner," the Treasury source said.

Public sector workers are also expected to have an immediate freeze in their pay.

But Ed Balls, the shadow education secretary, also speaking on The Andrew Marr Show, took issue with the need for draconian cuts.

"The priority has got to be growth and jobs," he said.

"And I fear that what's happening is we are making the mistake of the 1930s – the mistake of thinking cutting the deficit, even if that means putting growth and jobs at risk, is a priority."

On the subject of a possible budget VAT hike from its present 17.5 per cent level, Mr Balls said claimed it would militate against an economic recovery.

"It's not just the callousness, the unfairness of a rise in VAT. It's the fact that it would undermine recovery and jobs and therefore make it harder to reduce the deficit."

Meanwhile, the coalition government has announced it has recruited former Labour Cabinet minister John Hutton to head an independent pensions commission.

The commission's brief will be to find ways to cut the soaring bill for public sector pensions. Mr Osborne has already warned that the "unsustainable" rise in the annual bill for "gold-plated" pension schemes must be tackled.

The appointment of Mr Hutton, a former work and pensions secretary who retired at the election in May, may be seen as an attempt to temper trade union outrage over any government moves to reform pensions.

Mr Hutton said: "Reform of public sector pensions is a huge challenge for both the public finances and the public sector workforce.

"I welcome the opportunity to lead a root and branch examination of both the short-term and longer-term options for reform to public sector pensions."

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