Osborne says budget deficit threatens recovery

LONDON (Reuters) - Britain risks losing the confidence of the international markets unless it started tackling its record budget deficit, Conservative shadow chancellor George Osborne said on Friday.

Conservative Party shadow chancellor George Osborne delivers a keynote address at Demos in London August 11, 2009. REUTERS/Luke MacGregor

Speaking ahead of a G20 finance ministers’ meeting in London this weekend, he said Britain’s huge debt and continued public spending threatened to stall its recovery.

“If we don’t start dealing with this debt problem, if we don’t start addressing the problem, coming forward with the answers, gaining the confidence of international markets that we are aware there’s a problem and we’ve got a plan to deal with it, then I think that will threaten the recovery,” Osborne told BBC radio.

“I think the fact that Britain is not dealing with its debt crisis will actually threaten international confidence in the UK.”

Faced with lower income from financial services and rising welfare payments during the worst recession since World War Two, Britain’s budget deficit is forecast to reach 175 billion pounds this year, more than 12 percent of GDP.

The national debt is expected to double to 1.4 trillion pounds in the next five years.

Last month, Conservative leader David Cameron, tipped to become prime minister in a general election due by next June, said the country ran the risk of becoming less attractive to overseas investors, or unable to meet its obligations, if it continued borrowing.

In May, Standard & Poor’s cut Britain’s sovereign rating outlook to negative from stable, retaining its triple-A rating but warning there was a one in three chance of a downgrade.

Unlike France and Germany, which emerged from recession in the second quarter, Britain’s economy continued to languish, because of its huge deficit, Osborne said.

He said the government’s public spending fiscal stimulus was failing, saying instead the focus should be on the policy of low interest rates and quantitative easing, which was working.

“If you mean monetary stimulus, low interest rates and if the (Bank of England) governor judges it necessary, quantitative easing, yes, of course you need to keep that going until you are sure that your recovery is under way and you are sure you are anchoring your inflation expectations.”

Reporting by Avril Ormsby; Editing by Mike Peacock