LONDON, Oct 20, (Agencies): Britain will cut half a million jobs, lift the retirement age and slash welfare as part of an unprecedented cost-cutting drive announced on Wednesday which will test the strength of the economy and the government.
The long-awaited spending review confirmed £80 billion of cuts, sent unions into a fury and turned up the heat on the Liberal Democrats, the junior coalition partners who campaigned against such sharp fiscal tightening before the May election.
The jury remains out on whether the economy — just recovering from the worst recession since World War Two — can survive the squeeze which will cut growth by around half a percent each year. Analysts expect the Bank of England to keep monetary policy super-loose for the foreseeable future.
Nor is it clear whether the cuts — aimed at bringing down a record budget deficit of 11 percent of GDP — can actually be achieved. More of the burden has been shifted to the notoriously hard-to-cut welfare bill — an extra £7 billion on top of the 11 billion pounds cuts already announced.

Conservative finance minister George Osborne said that was the best way and would mean that government departments outside protected areas like health and international aid would only see their budgets shrink by, on average, 19 percent, not the 25 percent announced in his budget.
“Tackling this budget deficit is unavoidable. The decisions about how we do it are not. There are choices. And today we make them,” the 39-year-old who took office in May told parliament.
He said the state pension age for men and women will rise to 66 by 2020 and that 490,000 public sector jobs were likely to disappear over the next four years.
Conscious of public anger against banks widely blamed for the economic crisis, Osborne also said the financial sector will have to pay its fair share and legislation on a bank levy announced earlier this year will be published on Thursday.
“Our aim will be to extract the maximum sustainable tax revenues from financial services,” he said.
Opinion polls suggest the LibDems, the left-leaning junior coalition partners, are already in trouble. The coalition’s key message is that the cuts are fair but the Institute of Fiscal Studies has already branded the spending review “regressive” — that is to say it will hit the poor hardest.
Markets took the review in their stride and credit rating agency Fitch said it confirmed Britain’s AAA credit status.

But analysts say much will now depend on the strength of the recovery. Osborne is banking on a private sector recovery to make up for the cutbacks in the public sector.
“The Chancellor is making some rather heroic assumptions. Households may continue to save and pay down debt rather than spend, businesses may remain reluctant to invest and export performance could suffer from a lacklustre global recovery,” said Andrew Smith, chief economist at KPMG.
“With indicators already suggesting that the economy is losing momentum and confidence likely to be damaged by just the announcement of cuts and job losses, further monetary easing may well be necessary to compensate for the fiscal tightening now in the pipeline.”
The minister, officially known as the Chancellor of the Exchequer, said the cuts were the “greatest reform to the welfare state for a generation”.

Queen Elizabeth II will also feel the pinch, with royal household spending falling by 14 percent in 2012-2013 and the queen agreeing to a one-year suspension of goverment payments under the so-called “civil list.”
Ed Miliband, the leader of the opposition Labour party, said the cuts could harm the economy.
The government is “taking the biggest gamble in a generation with growth, with people’s jobs and people’s livelihoods,” he said shortly before Osborne’s announcement.
Unions lined up to lambast the cuts, which have sparked a series of protests in Britain including demonstrations by thousands of people in London on Tuesday.
“This is not a spending review — it’s a massacre,” said Derek Simpson, the joint leader of Unite, Britain and Ireland’s biggest union.

Dave Prentis, general secretary of UNISON, the largest public sector workers’ union, said the “ideologically driven” cuts were “poisoning the country’s chances of recovery.”
But business leaders welcomed the spending review — which the International Monetary Fund also endorsed last month in a boost to the coalition government.
“The chancellor has got the strategic direction of this spending review right,” said Richard Lambert, director general of the Confederation of British Industry.

The coalition started the cuts process Tuesday, announcing that it would shrink the country’s armed forces, scrap key assets including an aircraft carrier and reduce the defence budget by eight percent.
Among other cuts announced on Wednesday by Osborne, the BBC will take responsibility for funding the World Service, which was previously covered by the Foreign Office.
The spending review was unveiled as official data showed British public sector overspending widened in September to £16.2 billion, a record monthly high.
The pound was down against the euro after Osborne’s announcement at 88.10 pence to one euro, but was rising against the dollar at $1.580 to one pound.
British public borrowing unexpectedly hit a record high for a month of September, official data showed on Wednesday, just hours before finance minister George Osborne details the sharpest public spending cuts in decades.

Last month’s borrowing data reinforced the case for the cuts, aimed at reducing a budget deficit which was 11.1 percent of GDP last year, the highest for any big industrialised country.
That helped knock more than half a cent off sterling against the dollar and sent it to a day-low against the euro. December gilt futures also cut gains by around 15 ticks to stand 27 ticks up at at 124.34.
The Office for National Statistics said public sector net borrowing rose to £15.607 billion last month from £14.806 billion a year ago, confounding economists’ expectations for a modest fall. Britain’s monthly budget numbers are very seasonal, and this is the highest for a month of September since records began in 1993.