Osborne vows to eliminate deficit in five years

Britain's structural deficit should be eliminated in five years by cutting public spending and raising taxes, Chancellor George Osborne said on Tuesday in the coalition's first budget. Skip related content

"We are on track to have debt falling and a balanced structural current budget by the end of this parliament" in 2014-15, said Osborne.

The Conservatives had made a key election pledge to eliminate the bulk of the structural deficit within five years.

The newly-created Office for Budget Responsibility had forecast last week that Britain's structural deficit -- the level of borrowing which does not fall when the economy recovers -- was higher than expected.

The structural deficit was forecast to stand at 8.0 percent of GDP in the current financial year, before falling to 2.8 percent in 2014-15.

Britain will also slash another £17 billion of government spending and freeze public-sector pay for two years, Osborne announced.

"Because the structural deficit is worse than we were told, my budget today implies further reductions in departmental spending of 17 billion pounds by 2014-15," he said.

"The truth is that this country was living beyond its means when the recession came and if we don't tackle pay and pensions, more jobs will be lost.

"That is why the government is asking the public sector to accept a two-year pay freeze. But we will protect the lowest paid."

A levy will be imposed on British banks from January next year in a bid to raise £2 billion a year, Osborne confirmed.

The tax was part of a joint move with France and Germany, who would also announce similar levies Tuesday, he said.

"From January 2011 we will introduce a bank levy," Osborne told the House of Commons, adding: "Once fully in place we expect the levy to generate over two billion pounds in annual revenues."

He said a joint statement on the issue was due to be issued shortly simultaneously in London, Paris and Berlin.

VAT will be raised in January from 17.5 percent to 20 percent.

"On January 4 next year, the main rate of VAT will rise from 17.5 percent to 20 percent," Osborne announced, sparking an uproar among opposition Labour MPs in the House of Commons.

"The years of debt and spending made this unavoidable. This single tax measure will by the end of the parliament generate over £13 billion a year of extra revenues," he said.