THE 2010 BUDGET – AN OVERVIEW

You can’t please all of the people all of the time. But you can please all of the people some of the time and Alistair Darling’s third budget seems to have pleased all of the audiences he really needed to please – so far.

With little room for manoeuvre his biggest challenge was to build credibility with the markets in terms of his plans to cut the deficit, without scaring the electorate.

The muted response from the markets suggested he did – although the details will be pored over as the Budget’s Red Book is dissected in the next few days.

But the headlines that were to be grabbed were for the voters’ attention. Scrapping stamp duty for first time buyers purchasing a house for under £250,000 will boost the housing market and give young, aspirant voters a hand-up onto the housing ladder. Paying for it by increasing stamp duty on properties over £1m – where few Labour voters live – re-painted the dividing lines between Labour and Tory which have been well drawn over the last few months.

No changes in any of the gold standard measures of a budget – basic rate income tax, VAT – and the predicted increases in tobacco and alcohol duties with the exception of the 10 per cent rise in tax on cider.

A bit for the city, a bit for voters, then there was a bit for MPs sitting behind the Chancellor – a new tax treaty with the country where Tory Vice-Chairman Lord Ashcroft pays his tax, Belize.

This may be the last budget Alistair Darling delivers. In those circumstances, you might expect a politician to try to seal his place in history. The understated Chancellor will be very happy if historians take a decade of two to realise the significance of this one.

With no space for an election winning giveaway, this was a budget that could only lose May’s poll rather than win it.
It was said in the run-up to the 1997 election that, with a commanding poll lead, Labour’s task was to carry a priceless Ming vase across a highly polished floor without dropping it. If Labour are to have a chance in this election, the Chancellor’s task yesterday was to carry a leaking bucket of slurry across a room covered in marbles without spilling a drop. This he, so far, seems to have done.

The decision to have each department press release how it is to contribute to savings of £11 billion across government - an hour and a half after the Chancellor had sat down - was an enormous calculated risk.

Few of the savings came with departmental budgets attached, let alone details of implementation, but the thrust of the plan for cuts seems to have at least initially convinced the markets.

Now the Tories have until the weekend to dent, if not destroy, the Budget.

While granular detail on cuts may have been missing, the Chancellor opened the budget with an eloquent argument of the case for government intervention in the economy and industrial policy set in relief against the tenets of the Tories’ free market philosophy.

The Conservatives now have until the weekend to produce a counter case and undermine the Government’s one.
If they don’t manage to do that by the weekend, they will have ceded ground they can ill afford just a fortnight before the election is called.

The Chancellor was less detailing his economic plans to halve the deficit over the next four years and more building the economic case which will be the bedrock of Labour’s general election campaign over the next six weeks.

Budget day was not a day for winning for the government – it was a day not to lose.

The Tories need to make sure they don’t lose the argument over the next few days, or the polls will narrow further, and Vince Cable’s dreams of an office in the Treasury might just get a bit closer to becoming reality.

Read our in-depth analysis:

Or read below for a round up of the key announcements.

Key announcements

Economic Outlook

  • Borrowing: The main selling point for Labour was the lower than expected levels of borrowing for this financial year. Government borrowing stands at £167bn - £11bn lower than expected.
  • The Chancellor’s predictions on future borrowing now stand as follows: £163billion in 2010-11, £131bn in 2011-12, £89bn in 2013-14, and £74bn by 2014-15. Roughly speaking this means that Darling intends to halve the level of government borrowing in the next four years.
  • Public sector net borrowing is therefore forecasted to peak at 11.8% of GDP in 2009-2010, falling to 4% by 2014-2015.
  • This proposal is, according to the chancellor, the most ambitious and dramatic reduction of a deficit out of any of the G7 economies.
  • Total Managed Expenditure (TME) in 2010-11 is expected to be around £704bn in 2010-11.
  • In total the economy contracted by 6% during the course of the recession.
  • In line with current forecasts, the Chancellor predicted growth of 1-1.25% for 2010.
  • Finally, he downgraded the growth forecast for 2011 to growth of between 3% and 3.5%.

Industry and Business

  • The priority for the Chancellor was to reassure the bond markets that he is serious about deficit reduction, without scaring voters about the scale of necessary cuts. He wanted to defend the Government’s record of intervention in the economy, as opposed to the Tories’ free market policy and have clear red water between the parties.
  • He used the example of the investment by Nissan in Sunderland to produce electric cars as testament to the potential of Britain’s industrial workforce.
  • For small businesses the chancellor announced a one-off £2.5bn package to promote innovation, boost skills and invest in key infrastructure, to be funded from ‘reallocated spending’ and the extra proceeds from the tax on bank bonuses.
  • Government will fund a temporary increase in the level of small business rate relief, so that eligible small businesses occupying properties with rateable values up to £6,000 will pay no business rates for one year from October.
  • The Annual Investment Allowance for small firms has been doubled to £100,000, as has the Entrepreneurs’ lifetime limit which has been doubled to £2 million.
  • National Insurance will increase by 1% from April 2011 as was originally forecast.
  • No change was announced in capital gains tax rates.
  • Minimum wage will also rise by 2.2% in October 2010 reaching a level of £5.93 per hour.

Further Education & Young People

  • There will be a one-off investment of £270m (the University Modernisation Fund) to finance 20,000 additional student places.
  • £450m will be made available to extend the Young Person’s Guarantee scheme to March 2012, providing every 18-24 year old the opportunity to either gain employment or further training after a period of six months of unemployment.

Banks & Bonuses

  • The Chancellor waxed lyrical about the successful decision to part-nationalise a number of major banks, and stressed the successes which banks such as RBS have recorded in recent months. He stated that government stakes in these organisations would be sold in such a way (and at such a time) that they could be of maximum gain the tax payer.
  • The one-off tax on bankers’ bonuses raised in total £2bn, double the forecasted figure.
  • The Chancellor will back a tax on bank transactions but stressed that such an initiative would require global cooperation.
  • The Government intends to introduce a new ‘universal service obligation’, giving people the right to a basic bank account under certain conditions and will consult on the details.
  • RBS and Lloyds Bank Group will provide £41bn in small business loans, and £105bn to homebuyers and businesses. Both have agreed legally binding lending commitments which will ensure that lending remains on commercial terms, subject to market demand.
  • A new service will be set up to adjudicate credit disputes. The ‘Small Business Credit Adjudicator’ will ensure that small businesses are treated fairly when applying for a bank loan.

Fuel, Cigarettes and Alcohol

  • A 3p fuel duty rise will be phased in between April and January 2011, so that fuel duty will increase by 1p per litre on 1 April and 1p per litre on 1 October 2010, then by 0.76p per litre on 1 January 2011.
  • He also announced that fuel duty will increase by a further penny per litre in real terms to April 2014.
  • Duty on cider will rise by 10% above inflation from Sunday 28 March 2010.
  • Wine, beer and spirit duty will rise by 2% above inflation per year until 2014-15.
  • Finally, tobacco duty will rise by 1% this year and then 2% a year for future years.
  • Housing
  • A key announcement of the Budget was that stamp duty will be scrapped for homes below £250,000 for first-time buyers, effective immediately.
  • To compensate, stamp duty on residential property sales over £1m will increase to 5%. Also effective immediately.

Fiscal policy

  • An additional rate of income tax of 50% for incomes over £150,000 and a restriction of the personal allowance for those with incomes of over £100,000 will take effect from April 2010.
  • The Inheritance tax threshold has been frozen for next four years.
  • A clampdown on tax avoidance has also been announced, with the intention to raise £500m. A significant aspect of this clampdown includes new tax agreements with Belize, Grenada and Dominica.
  • The government will also extend the Time-to-Pay scheme, which allows businesses to spread tax payments over a timetable they can afford, for the whole of the next Parliament.

Government savings

  • All government departments must together find a saving of £11bn to meet their efficiency savings target.
  • Reforms to housing benefits are also estimated to save £250m, crucially the most expensive properties will be excluded from the housing benefits scheme.
  • Relocation of the civil service: 15,000 civil servants to be relocated outside London.
  • Asset sales: including Channel Tunnel rail link, the Dartford Crossing and the sale of the student loans portfolio.

Environment

  • The focus of the budget speech on Energy was to provide for future generations; meaning investment in nuclear and in renewable energies.
  • In order to ensure that investment is directed in this direction, a special investment bank will be created, and provided with £2bn to stimulate ‘green growth’. This bank will be funded in part from the sale of assets (such as the Channel Tunnel rail link) and partly from private investment.
  • £60m will also be invested to provide ports which can facilitate the growth of offshore wind.
  • Digital Economy
  • High speed broadband will be made available to 90% of the population by 2017 through a 50p duty, as announced in the previous Digital Economy Bill.

Pensions & the Elderly

  • The government will continue to provide an additional payment alongside the Winter Fuel Payment in 2010-11, worth £100 to households with someone aged over 80, or £50 if someone is over the female State Pension Age.
  • The Chancellor also promised that he will consider options regarding the Default Retirement Age, including increasing it or abolishing it all together. However, he made no firm commitments.
  • The Debt Management Office announced that they will increase the proportion of long-dated government bonds issued from 36http://www.hillandknowlton.co.uk/sites/all/libraries/fckeditor/editor/sk...); background-position: 0px -416px; " class="TB_Button_Image" alt="" src="http://www.hillandknowlton.co.uk/sites/all/libraries/fckeditor/editor/images/spacer.gif" />% to 45%.
  • For older people in work, the minimum number of hours needed to qualify for working tax credits will fall. And for those already retired, above-inflation increases in the basic state pension, as well as the pension credit, will ensure every pensioner will be entitled to a weekly income of at least £132.60.

Families & Children

  • The Government has announced that, from April 2012, it will provide additional support by increasing the child element of the Child Tax Credit for each child aged one and two by £4 per week.
  • This increase will be made regardless of the marital status of the parents.

Transport

  • £385m has also been set aside for investment in the transport industry.
  • £100m has been set aside for helping with local roads, £285m for motorways and the government has committed to the building of a high-speed rail network connecting London with the Midlands, with a view to extending this to the North and Scotland.

Read our in-depth analysis:

For further information please contact:
Paul Sinclair, Managing Director, Public Affairs
paul.sinclair@hillandknowlton.com 0207 413 3429

Ben Bladon, Consultant, Public Affairs
ben.bladon@hillandknowlton.com 0207 413

Edward Jones, Client Executive, Public Affairs
edward.jones@hillandknowlton.com 0207 413 3217