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Austerity in the UK: Osborne sharpens knife

Austerity has a foothold in Europe, with countries including Spain, Portugal and Greece all making cuts to get their books balanced. But it is not just the bailed-out euro zone countries that are feeling the pinch: Step forward the region's second-largest economy — the U.K.

George Osborne, the U.K.'s finance minister, will announce this year's budget on Wednesday and is expected to cut public spending further, despite the slowing British economy.

UK Chancellor of the Exchequer George Osborne speaks at a Conservative Party Conference.
Paul Ellis I AFP | Getty Images

Media reports over the weekend suggested there was a massive £18 billion ($26 billion) "black hole" in U.K. public finances where spending has overtaken incoming funds.

Osborne — or to give his full title, the Chancellor of the Exchequer — told the BBC on Sunday that he would cut a further 50 pence from every £100 the government spends by 2020. This would amount to around £4 billion of savings and would be combined with other revenue-boosting measures to keep the government on track to reach a budget surplus in four years' time.

The European Commission forecast in February that the U.K.'s headline deficit would decline from 5.0 percent of gross domestic product in 2014-2015 to 4.1 percent in 2015-2016 and 2.6 percent in 2016-2017.

CNBC takes a look at what this year's U.K. budget on Wednesday could feature.

Growth downgrades

Osborne has painted a decidedly bleak picture of the U.K. economy in recent media interviews, potentially preparing the country for growth downgrades in the Budget.

At the moment the U.K.'s Office for Budget Responsibility forecasts the economy will grow by 2.4 percent this year and 2.5 percent in 2017. However expectations are high that these forecasts could be trimmed this week.

"There will be less good news in this Budget than Mr. Osborne might have expected 10 months ago in the warm afterglow of the Conservatives' election victory. Once again events are conspiring against the Chancellor, making the path of fiscal rectitude longer and more arduous than he had hoped," Ian Stewart, Deloitte's chief economist, said in an article published on the firm's website.

The U.K. economy grew by 2.2 percent between 2014 and 2015 in volume terms and 0.5 percent in the last three months of the year, according to official statistics.

Public sector cuts

The Chancellor has already suggested government departments could face fresh cuts if growth continues to disappoint. These are likely to be levied across "unprotected" functions — that's everything bar healthcare, education and international aid.

Derek Halpenny, European head of global markets research at Bank of Tokyo-Mitsubishi, said that spending cuts would likely be loaded towards the end of parliament in 2020 and might be matched by a future income tax cut.

"Hence the budget announcement this week is unlikely to alter market expectations on monetary policy. Certainly, though, with Osborne planning further fiscal consolidation one could conclude that any downside surprises for the economy will have to be addressed by monetary rather than fiscal policy support," he said in a research note on Monday.

Energy industry boost

The fall in the price of oil has deprived the Exchequer of much-needed funds. The fall in the price of Brent crude to below $40 per barrel from above $100 prior to June 2014 means many of England and Scotland's North Sea oil fields will be lossmaking in 2016. As a result, there have been calls for the Chancellor to tinker with the tax regime in order to support the industry.

Roman Webber, head of energy and resources tax at Deloitte, said the Chancellor could consider reducing taxes on newly discovered oil fields in order to incentivize exploration. Or, he could cut the main corporation rate on oil and gas from 30 percent towards the 20 percent applicable to other industries, Webber said in an article on Deloitte's website.

Energy Futures Chart

Bank levy and asset sales

Osborne will announce plans to sell £16 billion worth of assets in Bradford & Bingley, a bank that was rescued during the financial crisis in 2008, Sky News reported on Saturday.

This could trump November's record-breaking £13 billion sale of mortgages from Northern Rock — another failed lender.

There's also speculation that Osborne has new plans to collect revenue from British banks. Last year he unveiled a bank surcharge of 8 percent of banks' profits, on top of existing corporation tax.

Hit to gambling

Morgan Stanley analysts led by Jamie Rollo said the Budget may feature an increase to the duty tax paid on gambling machines, which are high on the political agenda. The rate paid is currently 25 percent, which is low versus other countries in Europe countries.

Rollo said in a report forwarded on Monday that a 5 percent increase in Machine Gaming Duty could knock earnings at Paddy Power, Betfair and William Hill by 1 percent and 8 percent respectively.

He added that the Budget could also feature a cut to the maximum stakes offered on some betting machines.

Other so-called sin stocks could be in line for higher taxation, including tobacco, sugary soft drinks and petrol — particularly given currently low prices for the latter.

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