Emergency budget 2010 22 June
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Chancellor George Osborne’s first budget was not just a re-balancing of the nation’s books – but an attempt to re-structure the nation’s economy. The public sector is to be cut back radically and the private sector will be encouraged to fill the gap.
There were few shocks – except perhaps the shock of realising that measures which have been discussed for months are now to become reality.
The VAT increase to 20 percent from next January is what most households will see as the headline. But the effects of welfare cuts and cuts of 25 per cent, in real terms, for Government spending will have a real impact when they come.
This was ‘Pain Part 1’. The sequel, the Chancellor announced, will be on 20 October when he reveals the results of the Comprehensive Spending Review. Health and International Development spending will be protected. The Chancellor stated the desire to give some protection to Education and Defence. That means that if the average is to be 25 per cent some departments may see their budgets slashed even further. Ouch.
The Chancellor hopes that the dampening of demand, which the public spending cuts and VAT rise will inevitably have, will be balanced by incentives for the private sector. Corporation Tax will be cut by one per cent a year for four years until it hits 24 per cent.
Osborne wanted to distance himself from some of the effects of the austerity measures of Tory governments of the past.
He recognised the fact that these changes will have greater impact in the nations and regions of the UK and so will offer National Insurance breaks for new businesses set up there, and a Regional Growth Fund for England. Capital Expenditure will not be cut any further than the last government had indicated. The earnings link with the state pension will be restored and the Chancellor assured the Commons that his measures would not increase child poverty in the next two years.
The freeze in public sector pay for two years was alleviated slightly with the announcement of a flat rate rise for the 1.7 million people earning less than £21,000 of £250 in each of the next two years. But jobs will be lost after the details of the CSR are announced in the autumn.
The incentives for business will be welcomed and the private sector should be boosted. The question will be how badly public spending cuts dampen demand and what the welfare changes will make to social cohesion.
The iconic child benefit will be frozen for three years. Families earning more than £40,000 will have child tax benefits cut. And those on disability living allowance will be reassessed by their doctors with the aim of coming off it.
Governments of all colours have talked about getting those on long term sick benefits into work for years. All have backed off from it. Now Osborne has grasped the nettle and the question must be just how high a political price he will have to pay.
The increase in personal income tax allowances to £7,475 will take 880,000 of the poorest earners out of the tax system. But the vulnerable are still likely to be hit hardest by the budget and welfare cuts – and the middle classes will see smaller benefits for the tax they pay despite the chance of a one year freeze in council tax.
This budget marks the first real strain in the coalition. The LibDems specifically campaigned against any increase in VAT. Now LibDem ministers and backbenchers will have to defend it.
The Chancellor’s first budget was certainly radical and far-reaching. It was dictated not just by the state of the public finances but by his convictions about the need for a smaller state.
But many on the LibDem benches will be uneasy with that blueprint. Rebellions may be quelled as the budget goes through but this budget will drain the reservoir of discipline which the coalition has drawn upon in its first few weeks.
And there will be Tories too who will be angered by the concession to the LibDems to raise Capital Gains tax by ten per cent – a move which is bound to hit the middle classes and venture capitalists alike.
The markets reacted well to George Osborne’s first budget. Business should be boosted and the public have been preparing for to take their medicine for some time.
The political question will be whether they can still stand the taste in 12 to 18 months time. Alcohol duty may not have been raised in this budget – but the Chancellor certainly showed he has bottle.
Key announcements:
TAX
- The main rate of VAT will rise from 17.5% to 20% from 4 January 2011. Current items which are zero-rated, such as children’s clothes and food, will remain exempt.
- Corporation Tax will be reduced from 28% to 24% over the next four financial years. The small profits rate will be reduced to 20%.
- The government will work with low spending councils to freeze council tax for 2011-2012.
- Capital Gains Tax will be increased to 28% for higher and additional rate taxpayers, but will remain at 18% for those on basic tax rates. The annual exempt amount will remain at £10,100 (rising with inflation) for 2010-11 and for entrepreneurial business activities the 10% capital gains tax rate will be extended from the first £2million to the first £5million qualifying gains made over a lifetime.
- There will also be a review into alcohol taxation and pricing which will report in the autumn. At this time there will be no increases in the rate of duty on beer, wine or spirits but the Government will continue with the plans it inherited to increase the rates by 2 per cent above inflation each year to 2014-15. Increased duty rates on cider will be reversed from 30 June 2010, but secondary legislation will shortly be introduced to increase tax on cheap strong ciders.
- The personal income tax allowance will be raised by £1,000 from April 2011 to £7,475. The high rate income tax threshold will be frozen until 2013.
- Planned tax relief for the video game industry has been reversed.
THE ECONOMY
- The Office of Budget Responsibility has estimated that growth in the UK economy for the coming years will be 1.2% this year, 2.3% next year, 2.8% in 2012, 2.9% in 2013 and 2.7% in both 2014 and 2015.
- The Chancellor’s underlying standard is that 77% of total consolidation is to be achieved through spending reductions and 23% through tax increases.
- Consumer price inflation is expected to reach 2.7% by the end of the year.
- Unemployment rates are set to peak at 8.1% this year and then fall for each of the next four years, reaching 6.1% in 2015.
- According to the Office of Budget Responsibility, public sector borrowing will be £149 billion this year, £116 billion in 2011-12, £89 billion in 212-13, £60 billion in 2013-14, £37 billion in 2013-14, falling to £20 billion in 2015-16.
- Public sector net debt as share of GDP will be 62% this year and will peak at 70% in 2013-14. It will then begin to fall reaching 67% in 2015-16.
- £32billion per year will also be saved thanks to spending cuts by 2014-15. Details will be announced at the Comprehensive Spending Review on 20 October 2010.
- There will be no further reductions in capital spending totals.
GOVERNMENT SPENDING
- Government expenditure will continue to rise from £637bn in 2010-11 to £711bn in 2015-16 thanks to the increasing sums that will need to be spent on debt interest payments.
- Though the NHS and International Development spending are now protected, other government departments could see cuts of up to 25% over the next four years, implying a further £17bn worth of cuts in departmental spending by 2014/15. Education and Defence were also singled out as key areas where any spending cuts will be as restricted as possible.
PUBLIC SECTOR
- Public sector workers face a two year public sector pay freeze on staff earning more than £21,000 per annum. However, 1.7 million of those earning less than £21,000 will get a flat pay rise worth £250 in both years.
- Will Hutton is to draw up plans for fairer pay across the public sector, without increasing the overall pay bill. The government has made a commitment that those at the top of public sector organisations are paid no more than 20 times the salaries of those at the bottom.
- An independent commission will also review public sector pensions.
- The Government has announced it will seek private capital injection into the Royal Mail Group.
PENSIONS
- The rise in the state pension age to 66 will be accelerated. The Government also plans to consult shortly on how phase out the Default Retirement Age from April 2011.
- From April next year the basic state pension will be re-linked with earnings.
- The basic state pension will increase every year based on earnings, inflation or a 2.5% rise, whichever is highest.
WELFARE
- Benefits, tax credits and public service pensions will increase in line with the consumer price index rather than the retail price index. This will ensure consistency with the measure of inflation used by the Bank of England.
- The Government will freeze Child Benefit to help fund above indexation increases in the Child Tax Credit.
- Caps on housing benefit are to be introduced - from £280 a week for a one-bedroom property to £400 a week for a four-bedroom or larger. This will constitute an estimated saving of £1.8 bn a year by the end of the parliament.
- Sure start maternity grant will go to the first child only.
- The child element of the child tax credit will increase by £150 above indexation next year.
- Finally, the government will also introduce a medical assessment for Disability Living Allowance from 2013 for new and existing claimants.
BANKING
- A levy on banks will be introduced in January 2011, and will apply not only to the balance sheets of UK banks and building societies, but also to the UK operations of banks from abroad. Similar measures across France and Germany aim to help build international consensus on this issue.
BUSINESS
- A Regional Growth Fund will be established to provide finance for regional capital projects over the next two years.
- Capital allowances for the majority of plant and machinery assets will fall from 20% to 18%, while the allowance for longer-lived assets will fall from 10% to 8% from April 2012.
- Details of the new Green Investment Bank will be put forward after the Comprehensive Spending Review on 20 October 2010.
- The Annual Investment Allowance will fall from £100,000 to £25,000 a year to April 2012.
Contact
Paul Sinclair, Lead Counsel, Public Affairs
Paul.Sinclair@hillandknowlton.com
