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Britain unveils 'unavoidable' austerity budget

By the CNN Wire Staff
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UK to face 'unavoidable budget'
  • Britain's budget chief unveils the 'unavoidable budget'
  • Aims to help Britain cut its $1.3 trillion debt
  • Raises the VAT and cuts spending

London, England (CNN) -- Britain's budget chief took the wraps off his "unavoidable budget" Tuesday -- an austere spending plan that raises taxes and cuts spending as it attempts to help the government slash its $1.3 trillion debt.

Chancellor George Osborne said it "deals decisively with our country's records debts."

"It pays for the past and it plans for the future," he said, adding. "Yes, it is tough, but it is also fair."

The package of cuts was always expected to be deep as the new coalition government deals with Britain's debt of $1.3 trillion. The country's budget deficit is expected to be more than 11 percent of gross domestic product this year, second only to Ireland in Europe.

"This is the unavoidable budget," Osborne said.

One of the toughest changes was an increase in the value-added tax, or VAT, from the current 17.5 percent to 20 percent by January. The tax is charged on most goods and services with the exception of insurance, food, children's clothes, and books.

The VAT increase will generate 13 billion pounds ($19.1 billion) extra per year, he said, saying years of debt and spending had made the rise "unavoidable."

There will be no new increases in the tax on alcohol, tobacco, or fuel, however, Osborne said.

Among the cuts he announced was the scrapping of a Treasury Department unit designed to prepare Britain for the European common currency, because, Osborne said, Britain does not plan to join the euro during the coming five years of the parliament's term.

"I have abolished the Treasury's euro-preparations unit. Yes, one does exist," he said to chuckles in the House of Commons, "and the officials concerned have been redeployed to more productive activities."

The budget is the first for the new Conservative-Liberal Democrat coalition government, elected last month. Acting Labour Party leader Harriet Harman immediately attacked the measures as unfair, detrimental, and penalizing the poor.

Osborne announced a public sector pay freeze for two years, but said those earning less than 21,000 pounds ($30,875) would be protected.

Certain welfare benefits will be cut or reduced, he said. The government will introduce a medical assessment for those who want to claim a Disability Living Allowance, applying it to new and existing claimants by 2013, and the amount of the child tax benefit will be frozen for the next three years, he said.

Business tax rates will also be lowered as part of Osborne's plan for an "enterprise-led recovery." The small companies tax rate will be reduced from 21 to 20 percent, he said, and four annual reductions in the rate of corporation tax will take it to 24 percent.

A bank levy will be introduced in January, and taxpayers on higher rates will pay 28 per cent on their capital gains, he said.

The government also plans to help local authorities in England freeze council, or local, taxes for one year starting next April, he said.