Frugality And Responsibility Cue The Biggest Public Spending Cuts In 100 Years This Autumn

George Osborne outside No. 11

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…

Labour Forced To Drop Stealth Tax Rises

(Telegraph) – LABOUR HAS BEEN FORCED to abandon three stealth tax rises that Alistair Darling unveiled in last month’s Budget.

Following pressure from the Conservatives, the Government agreed to drop plans for a new tax on phone lines to fund super-fast broadband, increased taxes on cider and the scrapping of tax relief on holiday homes.

The tax hikes were abandoned following negotiations to fast-track the Finance Act – which introduces the laws necessary to enact the budget – through Parliament today ahead of the general election.

The Conservatives refused to sanction the fast-tracking of the legislation unless the three tax changes were dropped. The Treasury was forced to back down last night or face the prospect of failing to pass other key budget measures before the election on May 6th.

The move marks a coup for George Osborne, the shadow Chancellor, on the first day of the election campaign. It is understood that Philip Hammond, his deputy, and Conservative aides spent much of the day at the Treasury negotiating the revised budget.

Last night, Mr Hammond, the shadow chief secretary to the Treasury, said: “This is a major victory for businesses and consumers across Britain. The Conservatives have forced the Government to back down on three significant tax hikes.

“But the threat couldn’t be clearer – if Labour is re-elected all three taxes will come back. Only a Conservative Government will stop Labour’s tax increases.”

The tax on phone lines formed a key part of a flagship Labour plan to introduce super-fast broadband throughout Britain. Under the scheme, a new tax of 50p per month would have been introduced for each telephone line. It was estimated that consumers would pay a total of more than £100 million a year.

The Conservatives believe that broadband should be installed and paid for by private firms.

The changes to tax relief on furnished holiday homes were estimated to hit more than 120,000 self-catering holiday businesses – costing the holiday home owners an average of £4,000 each a year. The Conservatives warned it could have a far-reaching impact on the British tourism industry.

The third proposed tax rise to be abandoned was a ten-percent increase, above inflation, on the cost of cider. Mr Darling had argued this was necessary as cider was taxed too lightly compared to other alcoholic drinks. However, it was argued that the sharp tax rise could badly damage the British cider industry.

The Conservatives are expected to increasingly focus on their plans to lower taxes during the election campaign. Some senior Labour figures are concerned about the impact of the Tory pledge to abandon the proposed National Insurance rise next year. David Cameron said yesterday it threatened to “wreck” Britain’s economic recovery.

Conservative plans to offer tax breaks to younger married couples are set to dominate the election campaign next week.

Government Budgets ‘May fall by 25pc,’ IFS Says

(Telegraph) – GOVERNMENT DEPARTMENTS could see their budgets slashed by more than a quarter after the general election, the IFS has warned.

The Institute for Fiscal Studies said that Whitehall departments would have to find savings of £25 billion over the next two years, rising to £46 billion by 2014-15, to make Chancellor Alistair Darling’s Budget calculations add up.

However, the decision to protect front-line spending for schools, the NHS and the overseas aid budget for the next two years will mean the axe will fall disproportionately on other departments.

Carl Emmerson of the IFS said it had calculated that those departments whose budgets were unprotected would have to find savings of 14% – by 2012-13.

He said that, if the ring-fencing of the schools and health budgets were to continue after that, the savings would have to rise to 25.4% by 2014-15.

”This next spending settlement is set to be very tight for areas such as higher education, transport and housing,” he said.

The Government has been criticised for failing to provide details of cuts promised in the Budget.

The Treasury has said it will have to cut £39 billion from spending to meet targets for reducing the Government’s record deficit. That means almost £30 billion of cuts are yet to be explained.

The Ministry of Justice said it will save more than £340 million by closing 19 court buildings in England and merging bodies like the Meat Hygiene Service into the Food Standards Agency.

The Department of Children Schools and Families said it would make £1.1 billion of savings.

Some £950 million will come from schools, with savings also made at Sure Start children’s centres.

The department said the money will be saved by “greater use of collaborative procurement” and “reduced energy consumption”, but gave no details.

The Department of Health said the NHS will save £4.35 billion by driving down overheads, cutting agency staff and keeping people out of hospital where possible.

The department suggested that £1.5 billion will be saved by “driving down the cost of procurement.”

Annual savings of £550 million are expected from increasing staff productivity, reducing sickness and using fewer outside agency workers. And £60 million will be saved by using less energy.

Many other departments repeated previous broad commitments to save money by reducing consultancy bills, better procurement and information technology, and cutting staff absence.

The Ministry of Defence promised £700 million in savings from better “procurement and estate management.” The Home Office said it will save £350 million.

Vince Cable, the Liberal Democrat Treasury spokesman, said the programme was “totally vacuous” and suggested that most of the claimed savings will never be delivered.

He said: “If it’s inefficiency, why has it been tolerated all these years?”

George Osborne, the Conservative shadow chancellor, said: “This Labour Government has never been serious about tackling waste and inefficiency. Today’s announcements are meant to distract attention from the fact that they don’t have any spending plans beyond next year.”

Chancellor’s Forecasts Undermined By Latest GDP Figures

(BBC) – THE ROSY GDP FORECAST BY ALISTAIR DOWLING WAS SERIOUSLY UNDERMINED TODAY as the Office of National Statistics (ONS) published its preliminary results for the first three months of 2009.

GDP FiguresThe UK’s Gross Domestic Product (GDP), which measures the value of all goods and services produced, displays the worst six-month decline in GDP since the ONS first began publishing figures.

The ONS figures also showed that GDP for the year to the end of March was down by 4.1%.

EditorialIt is difficult to see how the chancellor can justify his budget prediction of a 3.5% decline in GDP this year, or his assumption of a return to growth in its last quarter. It increasingly looks like the raw economic data, upon which his budget was based, has been conveniently presented as a glass half-full, rather than a glass half-empty.

Of course, Mr Darling is in an onerous position. If he does not put an optimistic gloss on the current situation, he could later be accused of creating panic in the markets and making matters far worse. (Just as the press were accused of being the catalyst to Northern Rock’s demise). Politically, he has no option, other than to boost morale; but he does not have the right to seriously mislead the electorate.

The fact is that the outlook is grim, and there is little point in directing passengers towards the band playing on a listing deck — when the life-belts brandish the name: ‘HMS Titanic.’

What the histogram clearly shows is that the third-quarter recession of the 1990s was followed by an immediate recovery, which hiccuped a return to growth over the next two years. Moreover, it shows that the first green shoots took a full year to materialize, and a further three quarters to fully establish.

Any talk of green shoots at this particular stage in the cycle is simply the whiplash from the tsunami, which has ravaged the financial system. The worst may be over; but there are yet more aftershocks to be felt. The problem is that the government has already committed all its reserves to the battle.

The latest forecast, from the Centre for Economic and Business Research, is for a 4.5% contraction this year; making 2009 the steepest single-year contraction in economic activity since the 5.1% fall in 1931.

What all this means is that the chancellor’s figure of £220 billion, which he plans to raise this year, could be easily exceeded. And it could well be that the UK is forced, once again, to go cap-in-hand to the International Monetary Fund (IMF) to raise badly needed funds.

Either way, the UK is now firmly locked on the course of a prolonged period of austerity that will see further rises in unemployment; increased taxation; and severe cuts in public services.

… (MailOnline, 13/05/2009) – Darling’s forecast shattered as Bank of England warns economy will shrink by 4.5% this year

Darling’s 50 Minutes

ALISTAIR DARLING SURPRISED MANY by choosing to present an optimistic view of the UK economy in this afternoon’s budget. Despite the fact that he expected it to shrink by 3.5% in 2009 (its worst performance since 1945), he predicted growth would return later this year; reach 1.25% in 2010; and grow to 3.5% in 2011. His assumptions enable him to say that the government’s predicted long term trend of 2.75% growth remains unchanged.

This time last year, Mr Darling predicted public borrowing of £43 billion; but it actually turned out to be £90 billion (over twice his estimate). Similarly, he had projected borrowing of £38 billion for this year; but has been forced to revise his estimate to £175 billion.

More worrying is the Red Book figure for guilts that the government intends to sell this year to raise funds. Just three weeks ago, that figure stood at £150 billion; but it has been revised to £220 billion in this budget — more than the amount that is currently outstanding today.

Government debt, from a preferred level of 40% of GDP, rose to 57% last year and is now projected at 79% for 2009. The danger is that such leveraging will result in the UK’s triple-A credit rating being downgraded, and for the costs of debt to rise appreciably. Moreover, if the UK’s credit rating is downgraded, it may prove impossible for the government to sell the quantity of guilts it needs to raise the necessary funds.

As Mr Darling sat down, the IMF predicted that the UK economy will decline by 4.1% this year and 0.4% next year — far worse than his own announcements.

The chancellor predicted that the Consumer Price Index (the government’s preferred measure of inflation) will fall to 1% by the end of the year; but that capital investment would continue at historically high levels until 2012. However, when you look at the figures, it is clear that he is actually squeezing public spending by saying it will grow only by 0.7% per year from 2011 — a lower rate than when Mrs Thatcher was in power. There is also a provision of £3 billion in efficiency savings expected in the area of Health and Education, which, in effect, is a real-time cut.

Mr Darling expected the public finances to be back in balance by 2018.

Key points of his speech were as follows:-

Alcohol, tobacco and fuel

  • Alcohol taxes will go up by 2% from midnight. This is likely to put 1p on an average pint of beer.
  • Tax on tobacco will go up by 2% from 6pm (around 7p per packet).
  • Fuel duty will rise by 2p per litre from September. The fuel escalator will then return to put another 1p on the cost of a litre, above indexation, each April for the next four years.

Benefits

  • Child tax credit to rise by £20 by 2010.
  • Child trust funds for disabled children to rise by £100 a year, £200 a year for severely disabled children.

Car scrappage scheme

  • From next month, until March 2010, motorists will be able to obtain a £2,000 discount on new cars — if they trade in their old banger that is more than 10 years old. (They must be the registered keeper of the car and have had it for at least twelve months).

Environment

  • Britain commits to cut carbon emissions by 34% by 2020.
  • An extra £1bn to help combat climate change by supporting low-carbon industries.
  • £525m for offshore wind projects over the next two years.
  • £435m support for energy efficiency schemes for homes, firms and public buildings.
  • £405m to encourage low-carbon energy and advanced green manufacturing.

Government savings

  • Tax loopholes and schemes identified which could provide £1bn of extra revenue over the next three years if closed.
  • An extra £9bn in efficiency savings is planned.
  • Public spending to be cut from 1.1% next year to 0.7% in 2011-2012.

Help for business

  • Help for loss-making companies extended. They will be able to reclaim more taxes paid in the last three years until November 2010.
  • Businesses’ main capital allowance rate doubled to 40%.
  • New £750m strategic investment fund to help emerging technologies and regionally important sectors.

Housing

  • Scheme to guarantee mortgage backed securities to boost lending.
  • Stamp duty holiday for homes up to £175,000 to be extended to end of year.
  • Extra £80m for shared equity mortgage scheme.
  • £500m to kickstart stalled housing projects —including £100m for local authorities to build energy efficient homes.
  • £50m to upgrade housing for the armed forces.

Jobs and training

  • Government support for economy to protect 500,000 jobs.
  • All long-term unemployed under 25s to be offered job or training.
  • £1.7bn additional resources for Job Centre network.
  • £250m funding to help people get work experience in growth industries.
  • Funding to create 54,000 new places in sixth form education.

Pensioners

  • Grandparents of working age who care for their grandchildren will see that work count towards their entitlement for the basic state pension.
  • Winter fuel allowance to be maintained at higher level (£250 for over 60s and £400 for over-80s) for another year.
  • The basic state pension will be increased by at least 2.5%, regardless of inflation.
  • Savings limit increased from £6,000 to £10,000 (before being taken into consideration for benefits).

Savings

  • Annual limit for tax-free ISAs to rise to £10,200 for over-50s this year and for everyone else next year. (The cash ISA limit rises to £5,100).

Tax

  • Income tax for those earning more than £150,000 a year (currently 45%) will rise to 50% from April 2010, and those earning over £113,000 will lose the personal tax allowance.
  • Tax relief on pensions will be reduced for people earning more than £150,000 a year from April 2011.

… (24/04/2009) – Chancellor’s Forecasts Undermined By Latest GDP Figures

… (21/05/2009) – Britain’s AAA Rating Under Threat