OSBORNE UPS VAT IN 'UNAVOIDABLE' BUDGET (22/06/10)

Chancellor George Osborne said he would not hide tough measures in the Budget notes in what he called “the unavoidable Budget”.

Topping the bill in what was the biggest package of tax increases and spending cuts in a generation, was the rise in VAT from 17.5% to 20% from January 4, 2011.

"I'm not going to hide hard choices from the British people or bury them in the small print of the Budget document," said the Chancellor. “We are all in this together.”

The Chancellor said the new coalition government would ensure that debt is falling as a percentage of GDP by 2015/16.

The coalition believes that the bulk of the deficit reduction must come from lower spending rather than higher taxes, Mr Osborne confirmed. Research shows, he says, that spending cuts are a more effective way of reducing the deficit.

Mr Osborne kicked off his cuts by announcing that he was getting rid of a Treasury unit to prepare for joining the euro – something that both coalition partners had already said they would not seek to do in this parliament. It was a measure that sparked laughter from the House – but also paved the way for the more challenging cuts that would follow.

Current spending is predicted to rise to £711bn in 2015/16, thanks largely to a rapidly rising bill for debt interest, something that Mr Osborne said was "the price of economic failure".

But he said the UK economy was predicted to expand at a slower rate than predicted by Alistair Darling in his final Labour Budget in March, according to figures from the new Office for Budget Responsibility (OBR).

The forecast for 2011 is now for 2.6% growth, not 3.25%.

Mr Osborne - the youngest Chancellor for more than a century - vowed to eliminate Britain's budget deficit within five years, faster than was planned by the previous Labour government.

There will be a two-year pay freeze for public sector workers, said Mr Osborne, although the 1.7 million workers earning less than £21,000 will get a flat £250 pay rise (each year).

And Mr Osborne said it was simply not possible to deal with a budget deficit of the current size without undertaking lasting reform of welfare. To that end, from next year, with the exception of pension and pension credit, benefits, tax credits and public service pensions will rise in line with consumer prices rather than retail prices - saving more than £6bn a year by the end of the parliament.

Other welfare measures include: lone parents expected to look for work when their first child goes to school; child benefit to be frozen for the next three years; a medical assessment will be applied to new disabilities living allowance claimants from 2013; and housing benefit will be limited to a maximum of £400 per week for a four-bedroom house in what will be seen as fairly radical reforms.

It was better news for businesses. Mainstream Corporation Tax will be cut by 1% per year for four years from next year, bringing it down to 24%, while the employers' National Insurance threshold is to rise. Meanwhile, small companies' Corporation Tax will be cut to 20% next year.

From January 2011, a levy will be imposed on UK banks and the UK operations of foreign banks which will generate more than £2bn in annual revenue – something that the French and German governments have also agreed to.

Anyone who sets up a new business outside London, the south-east and east of England will be exempt from £5,000 of National Insurance contributions for each of first 10 employees they hire.

For consumers, there will be no new increases in duties on alcohol, tobacco or fuel. The Chancellor said that he will report back in the autumn on possible health-related measures on alcohol and on the possible per-plane, rather than per-passenger, levies on flights.

There were a number of tax measures – although, aside from the VAT increase, these were largely neutral. From midnight, higher-rate taxpayers will pay 28% on their capital gains. The higher rate income tax threshold will remain frozen to 2013/14, with a long-term objective to increase the personal allowance to £10,000 - that was one of the Liberal Democrats' key election pledges.

Meanwhile, the tax-free personal allowance on income tax will be increased by £1,000 in April, and a further £1,000 the following year, giving 23 million people up to an extra £170 per year and taking 880,000 people out of the tax system altogether.

Mr Osborne rounded off his maiden Budget speech, saying the new government "had to pay the bills of past irresponsibility... relearn the virtue of financial prudence.” How prudent these new measures will be waits to be seen.

BUDGET MEASURES - AT A GLANCE

TAX

From January 4 2011, the main rate of VAT will rise from 17.5% to 20%. Current zero-rated items like children's clothes and magazines will remain exempt.

Corporation Tax will be cut next year to 27%, and by 1% annually for the next three years, until it reaches 24%. The small companies' tax rate will be cut to 20%.

The government will help low-spending councils in England to freeze council tax for one year from April 2011.

Capital Gains Tax remains at 18% for low and middle-income savers but from midnight, higher rate taxpayers will pay 28%.

UK ECONOMY

The economy is predicted to grow by 1.2 % this year, 2.3% next year, 2.8% in 2012, 2.9% in 2013 and 2.7% in both 2014 and in 2015.

Consumer price inflation is expected to reach 2.7% by the end of 2010 before "returning to target in the medium term". The inflation target remains at 2%, as measured by the Consumer Prices Index.

Unemployment is forecast to peak this year at 8.1% and then fall for each of the next four years, to reach 6.1% in 2015.

BORROWING

The structural current deficit "should be in balance" by 2015-16.

The balance of spending cuts vs tax rises would be 77% to 23%.

The measures are forecast to result in public sector net borrowing of £149bn this year, £116bn next year, £89bn in 2012-13 and £60bn in 2013-14. By 2014-15 borrowing would reach £37bn, falling to £20bn in 2015-16.

SPENDING

Current expenditure to rise from £637bn in 2010-11 to £711bn in 2015-16, blaming a "rapidly rising bill for debt interest".

Mr Osborne said his Budget implied further £17bn cuts in departmental spending by 2014/15, unprotected departments face an average real cut of around 25% over four years.

He said compared with the plans set out by Labour, the government would cut additional current expenditure by £30bn a year by 2014-15.

There would be no further reductions in capital spending totals in this Budget but "careful choices" would be made about how it was spent. Projects with "a significant economic return to the country" would be prioritised - assessed in the autumn spending review.

PUBLIC SECTOR PAY

Public sector workers face a two-year pay freeze, although 1.7 million of those earning less than £21,000 will get a flat pay rise worth £250 in both years.

PENSIONS

The government will accelerate the increase in state pension age to 66.

BENEFITS

Child benefit will be frozen for the next three years.

Tax credits will be reduced for families earning over £40,000 next year.

From 2011 - except for the state pension and pension credit - benefits, tax credits and public service pensions will rise in line with the Consumer Price Index, rather than the, generally higher, Retail Price Index, saving over £6 billion a year by the end of the Parliament.

Housing Benefit will be reformed so there is a maximum limit of £400 a week, to save £1.8bn a year by the end of the Parliament.

The government will introduce a medical assessment for Disability Living Allowance from 2013 for new and existing claimants.

BUSINESS

From April 2011, the threshold at which employers start to pay National Insurance will rise by £21 per week, above indexation.

Tax relief for the video games industry will be scrapped.

CIGARETTES, ALCOHOL AND FUEL

No changes this time round

BANKS

A bank levy is being introduced

• Tax partners Ken Jones and Mike Horne will be available for consultation, either by telephone on our normal numbers or at our dedicated email address:budget@burgesshodgson.co.uk

• Our usual full summary of all the provisions will be on our website during the morning of Wednesday 23rd.