Billed as a 'tough but fair' Budget, Chancellor George Osborne has announced his plans to tackle the UK's record deficit while sustaining the economy.
Setting out the Government's target of bringing the current structural deficit into balance by 2016, the Chancellor said that it was on course to meet this goal a year early. However, the newly created Office for Budget Responsibility has revised down its forecasts for economic growth in the short term, cutting them from 1.3% to 1.2% for 2010, and from 2.6% to 2.3% in 2011. Public sector net borrowing is expected to be £149 billion this year, falling to £60 billion in 2013/14.
In order to meet the fiscal mandate, the Chancellor announced a combination of tax rises and spending cuts. An increase in VAT was widely expected in the so-called 'unavoidable Budget', and it was confirmed that VAT will rise from 17.5% to 20% with effect from 4 January 2011. Capital gains tax will also rise from 18% to 28% for higher rate taxpayers, from 23 June 2010.
Declaring Britain to be 'open for business', the Chancellor outlined plans to reform the corporation tax regime, with the main rate being reduced from 28% to 27% on 1 April 2011, followed by reductions of 1% a year thereafter until it reaches 24% in 2014. The rate for small companies will also be reduced from 21% to 20% from April 2011.
Meanwhile, the threshold for employer national insurance contributions will be increased by £21 a week above indexation. New businesses outside London, the East and the South East of England will enjoy a national insurance 'holiday' of up to £5,000 for the first 10 employees.
Wide-ranging changes to the welfare system will also result in savings to the tune of £11 billion by 2014/15, with cuts in Child Tax Credit for households with income of over £40,000 a year coming into force next year, together with new limits on housing benefit. Child Benefit will be frozen at its current rate for the next three years.
In a bid to protect lower earners, the basic personal income tax allowance will be raised from £6,475 to £7,475 from April 2011. Pensioners will see the restoration of the earnings link from next April. The banking industry, meanwhile, will share in the squeeze by means of a bank levy, which from January 2011 will generate an estimated £2 billion of revenue each year.
In recent years, Government spending has consistently exceeded Government receipts, resulting in an annual deficit and a spiralling national debt. In the March 2010 Budget the deficit was estimated at £163.4 billion, though this was revised downwards by the Office for Budget Responsibility.
In his last Budget, the then Chancellor Alistair Darling announced plans to halve the UK deficit within four years, but not to make spending cuts within the 2010/11 financial year. However, following the General Election and the emergence of the Coalition, tackling the deficit has become the top Government priority, with Chancellor George Osborne committed to an immediate £6.2 billion of cuts to ‘waste and low value programmes.’
This new direction, according to Prime Minister David Cameron, ‘marks an end to the years of recklessness and big government and the beginning of the years of responsibility and good government.'