Britain's treasury chief says he'll cut government borrowing from 10 per cent of GDP to one per cent within five years by means of spending cuts, including a freeze on financial support to the Queen.

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Chancellor of the Exchequer George Osborne holds his budget box outside his official residence at 11 Downing Street in London on Tuesday. ((Akira Suemori/Associated Press))

In an emergency budget aimed at repairing the country's economy, Chancellor of the Exchequer George Osborne said Tuesday his program "pays for the past and plans for the future."

Osborne said the Conservative-Liberal Democrat coalition government will cut its borrowing from the equivalent of 10 per cent of the country's total economic output to one per cent within five years.

That amounts to £30 billion ($45 billion) per year in cuts to spending by 2014-15.

Osborne confirmed that value-added tax — a levy on goods and services — will rise from 17.5 per cent to 20 per cent in January, though essentials including food, children's clothing and books will remain exempt.

Most civil servants except the lowest-paid will endure a two-year pay freeze, Osborne said. The government will also freeze child benefit payments for three years.

New bank tax imposed

Britain will introduce a new levy on banks in January which is expected to raise £2 billion ($3 billion) per year. France and Germany have agreed to impose similar levies, Osborne said. Canadian Prime Minister Stephen Harper has repeatedly said a bank tax is not necessary for Canadian financial institutions, given the stability of banks in Canada compared with those in other countries.

Osborne also announced a rise in capital gains tax from 18 per cent to 28 per cent.

The previous Labour government under Gordon Brown pumped billions into keeping the economy afloat as Britain endured a deep 18-month recession.

Harriet Harman, acting leader of the opposition Labour Party, accused Osborne of offering "a reckless budget that pulls the rug out from under the economy."

"Yes, it's his first budget, but it's the same old Tories, hitting hardest at those who can least afford it and breaking their promises," Harman said.

Britain's public debt has risen above $1.3 trillion, or 62 per cent of gross domestic product; unemployment is 7.9 per cent and inflation is stubbornly high at 3.4 per cent.

Ratings agency Fitch said the changes, if implemented, should "materially strengthen confidence" in British public finances. 

U.K. now in deficit-cutting camp

By bringing in the toughest cuts to public spending in decades, Britain, like most of Europe, moved firmly into the camp of those who say deficit-cutting is more pressing than government spending to stimulate growth.

The U.S. government has the opposite view. President Barack Obama is expected to urge caution about premature spending cuts at the G-20 summit in Toronto, which begins June 26.

On Tuesday, before the budget was introduced, Britain's independent Office for Budget Responsibility cut its prediction for the country's economic growth, based on the government's promise of spending cuts and tax hikes.

The budget office last week forecast 1.3 per cent and 2.6 per cent growth for 2010 and 2011, but on Tuesday revised that to 1.2 per cent and 2.3 per cent.

With files from The Associated Press