Emergency budget 2010 - Impact on Financial & Professional services
The deferred VAT increase and the dramatic squeeze on the Public Sector are likely to take the headlines.
Meanwhile, the market reaction to the budget has been modest. The value of the Pound was up 0.2 percent on the Dollar immediately after the budget and yields on 10-year gilts fell 3 points to 3.49 percent.
The City and business in general, have reacted positively to the budget; the importance of getting the UK budget deficit under control, far outweighing any misgivings about the impact of the banking levy.
The Banking levy, to be introduced in January 2011, will secure over £2 billion worth of annual revenue. The levy will apply to the balance sheets of UK banks and building societies, and to the UK operations of banks from abroad. Smaller banks will be exempted. This complements last week’s commitment to establish an independent commission on banking, chaired by Sir John Vickers.
The banking sector has accepted it must play a role in the recovery, with the British Bankers’ Association emphasising the need for a coordinated approach in maintaining a level playing field and allowing the sector to compete internationally.
For business, the budget represents a number of positive measures, although they too will suffer from a significant reining in of spending, the deferred rise in VAT is particularly important in light of this, most notably for retailers.
The cut in corporation tax will be welcome as will the plan to simplify the system and cut it further over the next four years by one per cent a year until it is at 24 per cent.
Viewed by the CBI’s Director General, Richard Lambert as the UK's "first important step on the long journey back to economic health," the budget he argues, serves the twin purpose of securing a credible plan for reducing public finances and sustaining growth.
The Regional Growth Fund will finance regional capital projects over the next two years and is an attempt to wean regions over reliant on the Public Sector off it and bears the hallmarks of typical coalition policy, appealing to the entrepreneurial and localism agendas of the Conservatives and the devolved instincts of the Liberal Democrats.
On pensions, there were several developments in the wake of the review of public sector pensions announced earlier in the week by the Government. The Chancellor continued this reforming theme by unveiling two cost saving measures designed to reduce the payment of future benefits by the state.
Firstly, pensions paid to public sector workers will now be increased annually in line with CPI rather than RPI – a change that could result in large savings to the public purse from even a small percentage difference between the two headline rates.
Secondly, plans to increase the state pension age have been accelerated in an attempt to more closely match rising life expectancy. Set against this change however was the additional cost of the restoration of the earnings link for the state pension from 2011. Under the Government’s ‘triple lock’ system, the state pension will now increase by at least 2.5% per year.
Finally, the Chancellor performed a u-turn on his predecessor’s decision to scrap higher rate tax relief on the pension contributions of higher earners. Instead, the pensions industry will be consulted on an alternative way forward, though the Chancellor is sticking resolutely to securing the £3.5bn worth of savings that this move would have brought.
KEY DATES AND DOCUMENTS
· The Government will publish a Green Paper on business finance before the summer recess to ensure that the banking system and financial markets meet the needs of the economy over the long term.
· A White Paper later in the summer will set out proposals to enable locally-elected leaders, working with business, to lead local economic development. As part of this change, Regional Development Agencies will be abolished through the Public Bodies Bill.
· The Government remains committed to a review of IR35 and small business tax and will release further details shortly.
· The Comprehensive Spending Review will be published on 20 October 2010
· An independent commission chaired by John Hutton, formerly Secretary of State for Work and Pensions, will undertake a fundamental structural review of public service pension provision by Budget 2011 and consider the case for short-term savings in the Spending Review period by September 2010.
