Britain's austerity budget to include tax cut

Britain unveils its latest austerity budget on Wednesday to further reduce the state deficit, but the country's highest earners are set to win a controversial cut in the top rate of income tax. Chancellor of the Exchequer George Osborne presents his annual 2012-2013 budget to the nation at 1230 GMT, and with many of its key announcements already leaked, market focus will be on changes to the Treasury's growth and deficit targets. Osborne has spoken of the need for the coalition government to stick firmly to its policy of slashing the country's deficit, especially since Britain is at risk of returning to recession this year. Just last week, Fitch warned that Britain's gold-plated AAA credit rating was increasingly at risk and placed the country on negative watch. "This is a just another warning to anyone who believes there can be deficit-financed giveaways in (the) budget," the Treasury said in response to the Fitch warning. Britain's Conservative-Liberal Democrat government, which won power in 2010, has since implemented huge public spending cuts and tax hikes to slash a record deficit inherited from the previous Labour administration. And the coalition is eager to preserve Britain's valuable AAA credit rating, that keeps state borrowing costs low, and avoid a Greek-style sovereign debt crisis. Ahead of Wednesday's budget, British media reported that Osborne would cut income tax for the highest earners -- from 50 percent to 45 percent, or to 45 pence to the pound. The former Labour government had raised the top rate from 40 percent to 50 percent and decided to impose the new level on income earned above £150,000 (180,000 euros, $238,000) a year following the financial crisis. However Osborne, presenting his third budget, has reportedly faced fierce pressure from the right wing of his Conservative Party and from business leaders to slash the top rate -- to help stimulate British economic growth. The budget "will be watched closely by the market, ratings agencies and most probably high income earners," said Joshua Raymond, chief market strategist at City Index traders. "Whilst it is going to be hard to shy away from the politically sensitive elements expected such as a potential reduction in the top tax rate ... there are going to be some crucially important elements on which investors will intensely focus, namely revisions to growth estimates, borrowing forecasts and additional measures to help stimulate growth." The government had in its November forecast that Britain's public sector net borrowing would hit £127 billion, or 8.4 percent of gross domestic product (GDP), in the 2011/2012 financial year ending in April. The Office for Budget Responsibility, acting on behalf of the government, added that state borrowing was predicted to fall to £120 billion, or 7.6 percent of GDP, in 2012/13. Other measures set to appear in Wednesday's budget include a government plan to issue state bonds, or gilts, lasting 100 years or longer, as the Treasury seeks to lock in historically low interest rates. Osborne has meanwhile said that he intends to launch an aggressive campaign on property tax avoidance. And in an announcement linked to the budget, the Treasury on Tuesday said that major British banks would take part in a £20-billion government scheme to boost lending to small businesses. Barclays, Santander UK, Lloyds Banking Group and Royal Bank of Scotland have agreed to participate in the scheme that will help companies access cheap loans. Europe's biggest bank HSBC declined to participate. On Monday, the government said it would raise national minimum wage rates so that workers aged 21 or over will be legally entitled to earn at least £6.19 an hour (7.47 euros, $9.82) from October.