The Chancellor, George Osbourne, was at the lectern for just under an hour today as he unveiled what he called the "unavoidable budget". It was not pretty viewing but then we knew it wasn't going to be. The Chancellor decided to play a straight bat and in an obvious dig at Gordon Brown promised that none of the pain would be "buried in the fine print" And so we got it; a dismal portrait of the UK finances and the measures required to balance the books and set the country on a new private sector-led path.
Many of the tax measures revealed today were trailed well in advance by commentators and there were few surprises. What everybody was waiting to see was where the axe would fall on spending and how deeply he would cut.
Public Sector Spending
The main headline for the country's 6 million civil servants was a 2-year pay freeze for all but those on less than £21,000, who were promised raises of £250 per annum.There were also promises to implement reductions in the earnings gap between those at the top of the public sector and those at the bottom, so much so that the Chancellor felt it necessary to underline the fact by telling a packed House of Commons that "the culture of excessive pay at the top of the public sector simply has to end". Earlier this year, the names of 172 civil servants earning more than the Prime Minister were released to the public. Given the general state of the public purse, Mr Osbourne clearly felt that this could not continue.
Cuts were announced to the Disability Living Allowance, the Housing Benefit, Tax Credits and Child Benefit. The Chancellor also promised cuts of 25% across all Government departments (excluding Health and International Development) over the next four years.
The one aspect of increased taxation which many may find appropriate is the levy promised on Banks which is due to raise about £2 billion. The Chancellor also promised to look into the fabled Financial Activities Tax (FAT) but it this idea has been around before so don't hold your breath.
So what happened to Taxation?
VAT: The big news was that the Chancellor went straight for the 20% rate of VAT effective from 4th January 2011. At this stage, it seems that the scope of VAT has not been extended so food and clothes should remain where they are. Expect to see heavy marketing this Christmas as people bring forward discretionary spend to avoid the higher rate.
Income Tax: The Chancellor raised the personal allowance threshold by £1,000 with promises to continue to work towards the Lib Dems’ promise of a £10,000 allowance. The threshold for employer's NIC was also raised in what the Government clearly positioned a reversal of Labour's "tax on jobs".
Capital Gains Tax: The expectation was that the rate would jump from 18% to 40/50%. The Chancellor however cited Treasury studies which showed that an excessive increase in CGT would actually lead to a decrease in CGT receipts. So he opted for the middle ground and left CGT unchanged for basic rate payers and increased it to 28% for higher rate payers. A particularly welcome aspect of the announcement is that the Chancellor has not introduced a system with an excessive top rate and then tried to whittle it down through various cumbersome reliefs. The system remains as accessible to the taxpayer as any tax system is likely to be and this at least is to be welcomed.
Corporation Tax: One interesting development is the announcement to reduce the corporation rate to 24%. This was forecast in the media over the weekend and it’s clear that this Government has woken up to the fact that multinationals are mobile and can relocate out of the UK if and when the UK becomes uncompetitive. This has been repeatedly highlighted over the last two years with several high profile companies relocating from the UK to either the Irish Republic or Switzerland. These relocations caused a loss of jobs in the UK market exactly when it could be least afforded.
Like many Governments, it seems the UK is finally coming round to the fact that sometimes it’s better to get a smaller slice of a big pie than a big slice of no pie. If you go further and consider the tax lost not just from the relocated companies themselves but also from the lost employment and the reduction in spending that results in the wider economy, the argument for retaining a competitive headline Corporation Tax rate is hard to refute.
The small business rate of Corporation Tax rate is also to be reduced to 20%.
The drive to encourage private business was the underlying message of this Budget. Whether it works, only time will tell but the changes to corporation tax can only be a positive move in maintaining current business and inviting inward investment going forward.
So was it a fair Budget?
The Chancellor started with "this is a hard Budget but fair". Was it really? Well, there is no doubt it was a hard Budget with pretty much everybody coming out a net loser; but this was always going to be the case and we knew it. Whether it’s fair is another matter. All in all, there was little in this Budget to increase the burden on the wealthiest section of society but as they have just had a 10% tax rise and a serious curtailing of available reliefs, that is probably fair enough. It cannot be doubted that the measures announced to day will impact middle Britain hardest.
The one thing that can be said for certain is that it was billed as an emergency budget and there was no denying that.