A platform for
longer term recovery

Concrete measures to tackle debt

The Chancellor of the Exchequer, George Osborne MP, delivered his first Budget speech on 22 June and announced a £40bn austerity package which forms part of his five-year plan to reduce the Budget deficit, rebalance the British economy and design a new model for economic growth. The Chancellor said the Budget’s twin aims were to deal with the deficit and provide a platform for longer term recovery.

Mr Osborne told MPs that unless the government took concrete measures to tackle debt, the consequences would be “higher interest rates, more business failures, sharper rises in unemployment and a potentially catastrophic loss of confidence and the end of the recovery”.

He acknowledged that growth would initially be slower as a result of the Budget, but would pick up towards the end of the parliament and signalled that the government’s “formal mandate” was to bring the structural current deficit into balance in the final year of the five-year forecast period, which is 2015/16.

A fixed target for debt will also be created, which in this parliament is to ensure debt falls as a share of GDP by 2015/16. But the Chancellor announced that the new Office for Budget Responsibility has suggested that the government’s “cautious approach” meant it could achieve its aim a year earlier.

The Chancellor said he would protect the poorest from the impact of a coming New Year rise in VAT to 20 per cent, a two-year freeze on public sector pay, a three-year freeze on child benefit, and cuts of more than 25 per cent in spending by some Whitehall departments.

Mr Osborne said a £1,000 increase in the income tax personal allowance to £7,475 a year, restoring the link between the state pension and earnings, and a £2bn increase in child tax credits would help those on the lowest incomes and ensure that the well-off were hardest hit by the toughest package of measures since the early 1980s.

“This emergency Budget deals decisively with our country’s record debt,” Osborne said, as he revealed plans to raise an additional £32bn from spending cuts – including an £11bn reduction in the welfare bill and £8bn in tax increases.

“It pays for the past. And it plans for the future. It supports a strong, enterprise-led recovery. It rewards work. And it protects the vulnerable in our society. Yes it is tough – but it is also fair.”

The Chancellor admitted that the impact of this emergency Budget would lead to lower growth and higher unemployment in the short term, but said “the need to avoid a Greek-style sovereign debt crisis left him with no alternative”. The UK economy, Mr Osborne said would grow by 1.2 per cent this year and 2.3 per cent in 2011.

Full details of departmental spending cuts will be announced in the October spending review, but the Chancellor said welfare reforms would include less generous housing benefit and stricter rules for disability benefits.

Banks and building societies will have to pay a new £2bn levy following their pivotal role in causing the financial crisis that led to the longest and deepest recession in Britain since the Second World War. But the levy was smaller than the City had feared and there was also some relief that the Chancellor raised capital gains tax (CGT) from 18 per cent to 28 per cent on high earners rather than to the 40 per cent or 50 per cent that had been expected.

The VAT rise, due to come into force next January, will generate more than £13bn a year by the end of this parliament. Zero-rated items including food and children’s clothes will remain exempt from VAT over the course of this parliament.

Although health and international aid would be ringfenced, the Chancellor said that reductions to other government departments totalling £17bn by 2014/15 equated to 25 per cent cuts over the next four years.

The Chancellor announced that from next year he will increase benefits, with the exception of pension and pension credits, in line with the lower CPI index of inflation, instead of the RPI index. This will save more than £6bn by the end of the parliament, he said.

Pensioners will get a new “triple lock guarantee” of an annual increase in line with earnings, prices, or a 2.5 per cent increase, whichever is the greatest.

The Chancellor said the measures aimed to protect children and pensioners and ensure that the richest bore the largest share of the burden. “Sadly, with this unavoidable Budget we’ve had to increase taxes. We have to pay the bills of past irresponsibility and relearn the virtue of financial prudence. But in doing so we’ve ensured that the burden is fairly shared”.

“Today we have paid the debts of a failed past and laid the foundations for a more prosperous future. The richest paying the most and the vulnerable protected: that is our approach”.

The Chancellor’s plans to raise personal allowances for basic-rate taxpayers by £1,000 to £7,475 from next April, will take 880,000 of the lowest paid out of income tax altogether and save 23 million lower-rate taxpayers up to £170 a year. He said the coalition aspired to increase this to £10,000 in the long term.

He said to cheers that the state pension would be linked to earnings, not inflation, from next April.

And, Mr Osborne announced the child element in the tax credit system would rise by £150 above inflation at a cost of £2bn. He said this would mean that there would be no increase in child poverty and tax credits would be targeted at “those who need the help most”, meaning that payments to families earning more than £40,000 would be reduced from next year.

Those claiming the Disability Living Allowance (DLA) will face a new medical assessment from 2013. The Chancellor said the cost of the DLA had quadrupled in real terms to more than £11bn since its introduction 18 years ago, making it one of the largest items of government spending.

Mr Osborne also made a commitment that 1.7 million public servants who earn less than £21,000 would receive a pay rise of £250 in each of the next two years.
He confirmed that the operational allowance for soldiers serving in Afghanistan would double to £4,800.

The 10 per cent CGT rate for entrepreneurs which previously applied to the first £2m of qualifying gains has been extended to the first £5m.

Mr Osborne said that while everyone was being expected to contribute, the government would make sure that everyone would share in the rewards “when we succeed”.

He added that the banking sector would be expected to make a greater contribution, with a banking levy introduced from next January. Once in place, the Chancellor has forecast this will generate more than £2bn a year. Smaller banks with liabilities below a certain level will be exempt from the levy.

The Chancellor announced the government was also exploring the costs of a financial activities tax on profits and remuneration, with international partners. He’s offered a “deal” to local authorities, saying “if you can keep your cost increases low, then we will help you to freeze council tax for one year”. He said this would save the average family £35 a year.

Citing the “dire need for reform” of housing benefit, the Chancellor outlined a package of measures that he said would reduce the bill by £1.8bn a year by the end of the parliament. They include a cap of £280 a week for a one-bedroom property and £400 a week for four or more bedrooms.

Mr Osborne said there would be no new increases in duties on alcohol, tobacco or fuel after the “substantial increases” announced in Labour’s March budget. The additional 10 per cent levy on cider proposed in Alistair Darling’s final budget in March is being scrapped.
The Chancellor told MPs: “It is a balanced package that will send the signal that Britain is open for business”.