NO SMILING FACES accompanied the Chancellor’s battered despatch case on its last outing to the commons, yesterday. Its contents were nothing to smile about.
Thirteen years of the last Labour government’s spending binge had left the UK with a structural deficit in which its debt would still be rising in 2014/15 to 74.4 per cent of GDP – and with annual debt interest payments set to reach £67 billion in that year.
The situation, George Osborne explained, was unsustainable.
Faced with the need to raise enough additional revenue to pay-down Britain’s record debt, the coalition government had no alternative but to raise VAT from its current level of 17.5 per cent to 20 percent from 4th January 2011; but the tax would not be extended to include currently exempt items like fresh food and children’s clothes. But the Chancellor acknowledged that the regressive tax hits the poorest in society most, and that he had modified other parts of the taxation system to mitigate this effect.
There is to be a £1,000 increase in the personal allowance – and there will be no increase in alcohol, tobacco, or petrol duty. Moreover, by reducing the level of the basic rate limit and the National Insurance Upper Earnings/Profit Limit to keep it aligned with the income tax higher rate threshold, the Chancellor ensured that higher rate tax payers would not benefit from the measure.
From 23 June 2010, capital gains tax will rise from 18 to 28 per cent for those with total income and taxable gains above the higher rate threshold; and the 10 per cent capital gains tax rate for entrepreneurial business activities will be extended from the first £2 million to the first £5 million of qualifying gains made over a lifetime. It was also confirmed that the annual exempt amount for capital gains tax will continue to rise in line with inflation and will remain at £10,100 for 2010-11.
To reign-in the country’s deficit, Osborne proposed to raise around 20 per cent of the additional funds needed through taxation – and 80 per cent through cuts in public expenditure; but the vast majority of the latter’s detail will not be announced until Autumn’s budget, which will see the majority of departments trying to cope with 25 per cent cuts.
As predicted, changes to the benefits system were announced to ensure that those whom are able to are encouraged to find work. Housing benefit would, at long last, be capped (at £280 per week for a single bedroom flat to £400 per week for a four-bedroom or larger property) and time-limited for claimants who can be expected to look for work. Housing Benefit for working age claimants in the social rented sector, who are occupying a larger property than their household size warrants, is also to be restricted.
Support for Mortgage Interest will be paid at the level of the Bank of England’s
published Average Mortgage Rate from October 2010.
Disability Living Allowance will be subject to objective medical assessments from 2013/14 and Child Allowance will be frozen for the next three years. In addition, tax credit eligibility for families with a household income above £40,000 will be reduced from April 2011 and further changes will be made to the threshold in 2012/13 to focus tax credits on lower income families. The Government also announced that it will increase the rate at which tax credits are withdrawn once household incomes rise.
Those lone parents with their youngest child over five will be moved onto Jobseekers Allowance rather than Income Support from 2011-12; and from April 2011 the government will restrict eligibility to the Sure Start Maternity Grant to the first child only and abolish the Health in Pregnancy Grant from January 2011.
The Chancellor announced that the government will use the CPI for the price indexation of benefits and tax credits from April 2011. The change will also apply to
public service pensions through the statutory link to the indexation of the Second State Pension.
The basic State Pension will be uprated by a triple guarantee of earnings, prices or 2.5 per cent, whichever is highest, from April 2011; and it will increase in April 2011 by at least the equivalent of RPI.
From April 2011, the government will end the existing rules that create an effective obligation upon private pension holders to purchase an annuity.
With 25 per cent cuts in departmental spending on their way in the Autumn, George Osborne laid out changes aimed at encouraging the private sector to expand and take-on more staff.
The main rate of corporation tax will be reduced from 28 per cent to 24 per cent over the course of four financial years from April 2011; the small profits rate to 20 per cent, instead of the planned increase to 22 per cent, from April 2011.
There is, however, to be a reduction in the capital allowances main rate from 20 per cent to 18 per cent, and the special rate is to be reduced from 10 per cent to 8 per cent from April 2012. Similarly, there is to be a reduction in the Annual Investment Allowance from £100,000 to £25,000 from April 2012.
The Emergency Budget was broadly welcomed as being both necessarily firm and fair; but the real pain, for Castle Point residents, will not be apparent until the Autumn when those 25 per cent cuts are announced…