U.K. Conservatives Gamble on Hit to 4 Million Workers

By Gonzalo Vina and Robert Hutton

Oct. 7 (Bloomberg) -- The Conservative Party’s ambition to freeze pay for 4 million workers and abolish tax breaks for wealthy families is a gamble that voters will reward the opposition for specifics about curbing Britain’s budget deficit.

George Osborne, the party’s lawmaker in charge of finance policy, said yesterday he’d cut government spending by 7 billion pounds ($11 billion) a year if the Conservatives win the next election. About 3.2 billion pounds of the savings comes from leaving unchanged the wages of all except the lowest-paid government workers, including teachers, nurses and police.

After leading in the polls for almost two years, David Cameron’s party is responding to criticism from Prime Minister Gordon Brown that the opposition lacks substance. Osborne, 39, argues that his candour about the scale of the pain to come shows he’s up to the job.

“He’s got to the point where he needs people to take him seriously,” said Andrew Cooper, founder of Populus Ltd., a polling company. “Their feeling was that part of the softness about their support is down to lack of clarity about what they’re going to do.”

The proposed tightening, outlined at the Conservatives’ annual conference in Manchester, represents the first steps in an austerity program needed to slash Britain’s deficit, which according to the Treasury will peak next year at 175 billion pounds, the largest in the Group of 20 nations.

Difference in Emphasis

The Treasury extended 1.4 trillion pounds of support to the economy and banks since Lehman Brothers Holdings Inc. filed for bankruptcy last year. The pound has lost almost 30 percent of its value against the euro since the beginning of 2007. The British currency was little changed yesterday.

While both of Britain’s two main political parties take a similar approach to reducing debt, Cameron and Osborne have emphasized cutting the size of state while Brown says bankers and the rich should feel most pain. Osborne argues his plan spread the pain evenly across society.

“We’re all in this together,” Osborne said on BBC radio today, repeating one of the themes of his speech. “We want to protect the most vulnerable. The country has run out of money. If you don’t get on top of that problem, long term interest rates go up, jobs are lost and you get into a debt spiral.”

More to Come

Economists said any government must go much further to close the budget gap. Osborne’s package would save about 7 billion pounds a year by 2015, which would add to 33 billion pounds of cuts already earmarked by Labour.

That would leave Cameron’s team needing 26 billion pounds worth of further savings needed to balance the budget, according to the Institute for Fiscal Studies, a non-partisan researcher examining the public finances.

Osborne said yesterday he will “root out waste, eliminate failing programs, review procurement and increase productivity,” though he didn’t estimate how much more could be saved.

“This will require a lot of squeezing, but the big question is if such inefficiency exists why hasn’t it been addressed already,” said Gemma Tetlow, an economist at the IFS, which is based in London.

Labour Chief Secretary to the Treasury Liam Byrne said Osborne’s reductions will hurt middle earners the most.

“George Osborne comprehensively failed the economic credibility test,” Byrne said in an e-mailed statement. “He said ‘we’re all in this together’ but then attacked the mainstream middle.”

Tax on the Rich

Osborne promised to stop giving tax breaks to wealthier families. He also aims to lift the retirement age as early as 2016, a decade before the government plans, to save money on state pension payments.

“Osborne has in effect guaranteed that these policies will pave the way for a return to traditional Tory politics -- hitting the public sector now to pay for tax cuts for millionaires later,” said Vince Cable, who speaks on the economy for the Liberal Democrats, the third-biggest party. “The total amounts to nothing more than a drop in the ocean.”

Under Osborne’s plan, families earning more than 50,000 pounds a year will get fewer tax breaks. Those claiming welfare benefits face tighter checks to remain classified as too sick to work. He also will keep Labour’s planned tax increases on those earning more than 150,000 pounds for as long as public sector pay is frozen.

Squeezed Hardest

State workers will feel the hardest squeeze, with all except the bottom 20 percent, who earn less than 18,000 pounds a year, having their pay frozen in 2011.

“Do they have a clue what it’s like to live on 18,000 pounds a year?” asked Mark Serwotka, head of the Public and Commercial Services Union, which represents civil servants. “They are targeting people who can ill afford to pay.”

Osborne also proposed to cap pension payouts for government workers at 50,000 pounds a year. He plans to cut 3 billion pounds in costs by eliminating state-sponsored advisory groups, known as quangos.

“At least he’s being honest,” said Jonathan Baume, general secretary of the First Division Association, which represents 19,000 senior civil servants. “But it’s a bit hard to make sense of the financial and jobs implications until we see the details. Potentially it’ going to be very hard.”

Osborne this morning defended his decisions, suggesting that Brown’s government will have to make the same decisions if remains in office.

“I don’t think of it as a gamble,” Osborne said on BBC radio. “Whoever wins the election is going to have to take these decisions. Anyone who tells you otherwise is frankly lying. I will have a mandate to put the public finances back on a sound footing.”

To contact the reporter on this story: Robert Hutton in London at rhutton1@bloomberg.net