U.K. readies for $40 billion of tax hikes, spending cuts

By Simon Kennedy , MarketWatch


LONDON (MarketWatch) -- The U.K.'s new Chancellor George Osborne will Tuesday lay out plans for billions of pounds of spending cuts and tax increases as he attempts to tread a fine line between narrowing the deficit, while avoiding derailing the recovery.

In an emergency budget that comes just six weeks after the Conservative and Liberal Democrat alliance took office, Osborne will announce further fiscal tightening equivalent to around 2% to 3% of gross domestic product, economists said.

The majority of that will come in the form of spending cuts, which will also drive another cut in the outlook for growth next year.

Economists at J.P. Morgan said they expect 28 billion pounds ($42 billion) of new fiscal tightening measures, with at least half of that total in place by the end of fiscal 2012. The newly-created Office for Budget Responsibility will also likely cut its 2011 growth forecast to 2.3% from 2.6%, the broker added.

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