U.K. stakes its future on plan to restore finances

LONDON -- Fighting record debt, the British government on Wednesday outlined the largest cuts to public spending since World War II -- slashing benefits and thousands of public sector jobs with an austerity plan aimed at restoring the nation's finances.

After the country spent billions bailing out indebted banks, and suffered a squeeze on tax revenue and an increase in welfare bills, Treasury chief George Osborne staked the coalition government's future on tough economic remedies.

Osborne confirmed there would be $128 billion in spending cuts through 2015, which he claims are necessary along with some tax increases to wipe out a spending deficit of $172 billion.

As many as 500,000 public sector jobs will be lost, about 18 billion pounds ($28.5 billion) axed from welfare payments and the pension age raised to 66 by 2020, earlier than previously planned.

Even Queen Elizabeth II will take a hit, asked to trim the budget the government provides for her palaces and staff by 14 percent.

"It is a hard road, but it leads to a better future," Osborne said, preparing the public for hardship as he seeks a balanced budget within four years.

Osborne stood on the floor of the House of Commons for more than an hour and ruthlessly dismantled program after program built during the Labour government's 13-year reign, saying Britain must "confront the bills from a decade of debt."

The Conservatives promised to scythe through Britain's debts after forming a government with the smaller Liberal Democrats following an inconclusive May election.

Labour lawmaker Alan Johnson, his party's economic spokesman, claimed many Conservatives relished the opportunity to shrink the size of the British state by slashing government jobs and programs.

"We've seen people cheering the deepest cuts to public spending in living memory," he told parliament.

Osborne insisted Britain's richest would bear the greatest burden of tax rises and welfare cuts, citing changes that will see about 1.5 million better off families lose child benefit payments. However, poorer Britons will have housing payments and about a dozen other benefits restricted.

While many ordinary Britons will lose out, Osborne confirmed a temporary levy on bank balance sheets will be made permanent, potentially raising billions of dollars. "We will extract the maximum sustainable taxes from the banking system," Osborne said.

Spending on health, education and overseas aid will be maintained at current levels or increased, while major transport projects and a 1 billion ($1.6 billion) plan to showcase carbon capture and storage technology will go ahead.

But Osborne said almost all other areas of government must make savings -- though departments faced average cuts of 19 percent to their budgets, not the 25 percent feared.

Some critics believe the government could have chosen to clear Britain's debts at a slower pace, protecting public sector jobs. They accuse Osborne of an ideological commitment to small government and using the chance presented by the economic issues to carry it out.

"This spending review will throw a generation of people on the scrap heap," said Mark Serwotka, general secretary of the Public and Commercial Services labor union. "These cuts are a political choice."

Osborne confirmed the policing budget will fall by 4 percent a year -- part of an overall 23 percent cut to Home Office's resource spending. The Association of Chief Police Officers said Britain would have fewer police as a result.

In one of the most significant proposals, Osborne said the state pension age for men and women will rise to 66 by 2020, four years earlier than planned. It will alter retirement plans for 5 million people, but save 5 billion pounds ($7.8 billion) a year once it comes into effect.

Members of the public across Britain were anxiously examining the details, fearing the impact on jobs and services -- particularly in areas of northern England which are heavily dependent on public sector employment.

In the southern London district of Croydon on Tuesday, a group of seniors discussed the cuts at a government-funded community group already struggling with budget constraints.

Eileen Dean, an 83-year-old retiree, worried what young and old alike would do if Osborne's plans forces the group to close. "The kids aren't going to have anything to do, it'll be back to playing football in the streets and breaking windows," she said. "I might have to join them."

Britain's 85-year-old former leader Margaret Thatcher was among others debating the plans -- her son said -- despite being sent to hospital on Tuesday following a bout of flu.

Thatcher's successor, David Cameron, on Tuesday announced an 8 percent cut to the annual 37 billion pound ($59 billion) defense budget over four years, though he insisted Britain would properly fund the mission in Afghanistan.

Osborne promised Britain would have the resources to tackle terrorism and to protect the 2012 London summer Olympic Games, but confirmed the country's spy agencies will be asked to make savings.

Despite a 650 million pounds ($1.03 billion) package for new cyber terrorism defenses, Britain's three major intelligence agencies face about a 7.5 percent cut over five years. They share an annual budget of about 2 billion pounds ($3.2 billion), though the government never discloses the share given to each agency.

Hundreds of London-based diplomats are likely to lose their jobs under a 24 percent cut to the foreign ministry's resource budget, while the British Broadcasting Corp. must take on the full costs of running the World Service -- previously subsidized by the Foreign Office.

Still, despite the cuts to domestic spending, Britain will still meet a U.N. target to spend 0.7 percent of gross national income on overseas aid by 2013.

"Even in these difficult times, we will honor the promise we made to some of the very poorest people in the world," Osborne said. However, some analysts predicted the public may demand aid spending is reduced, as they cope with hardships.

Recent surveys and protests suggest many Britons are uneasy about the spending cuts. On Tuesday, hundreds of labor union members marched to Parliament -- and a handful of climate campaigners climbed atop the Treasury building -- to oppose Osborne's plans.

Hilary Green, a 58-year-old lawyer, said cuts to police departments would be a worry. "I'd definitely have more police than a lower national debt," she said, in the lobby of London's King's Cross rail station. "They should focus on taking away desk jobs, not retiring people from the front lines."

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Associated Press Writers Benjamin Timmins and Raphael G. Satter in London contributed to this report