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…

Scale Of Spending Cuts Laid Bare In TV Debate

(Telegraph) – THE TRUE SCALE of the public spending pain that awaits whichever party wins the election was laid bare by the unanimous verdict of the Chancellor and his Conservative and Liberal Democrat counterparts in a live television debate.

During the debate on Channel 4 Alistair Darling, George Osborne and Vince Cable were asked how deep cuts will need to be to restore Britain’s economic credibility. They all agreed that the cuts would have to be tougher than those imposed by Baroness Thatcher in the 1980s.

The discussion was a curtain-raiser for the party leaders’ ground-breaking television debates that will take place once the election is called.

The Chancellor last week surprised other Labour figures when he allowed himself to make the comparison with the Conservative government of the 1980s.

All three men are likely to be privately happy with their performance but no one managed to land a knockout blow.

There had been concerns from some in Tory ranks that Mr Osborne would struggle to make an impact, but in the 50 minute debate he stood his ground on the key economic issues and made Mr Darling shift uneasily over Labour’s plans for a death tax.

Mr Cable, who claimed he was the only politician of the three to have experience of industry and the only one to have warned of the impending crash, was able to tap into the audience’s apparent distrust of the other two parties. He was applauded and got one of the very rare laughs from the Channel 4 audience.

Mr Osborne had to withstand what appeared at times to be an attempt by Mr Darling and Mr Cable to gang-up on him. Mr Cable, who got more applause from the studio audience than his two counterparts from the main parties, got very personal in his final comments.

The Liberal Democrat treasury spokesman warned that Mr Osborne and his party wanted “another chance to get their noses in the trough and reward their rich friends.”

He added that the Conservatives has “wasted” the revenues from North Sea gas and had “presided over two recessions.”

But Mr Osborne kept his cool and made a direct appeal to voters saying they would be able to make the choice between change or more of the same after 13 years of Labour failure.

He said: “They [Labour] took one of the strongest countries in Europe and we are now one of the weakest.”

And he hit back at Mr Cable, by pointing out that the choice was Conservative or Labour because “there is not going to be a Liberal Democrat government.”

The shadow chancellor has been under pressure in recent weeks to show that he can articulate the true scale of the problems facing the country and translate it into vote winning rhetoric. He repeatedly referred to how it was the “audience’s money” and “the people at home” who were paying for Labour mismanagement of the economy.

But the debate was also characterised by a number of areas on which the three parties seemed in agreement. They included the new 50p tax rate for top earners, reform of public sector pensions the need to keep options open on future VAT increases.

Mr Darling attempted to seize on Mr Osborne’s decision yesterday to say that Whitehall cost savings would be used to reverse part of Labour’s planned National Insurance rise.

The Chancellor said Mr Osborne was taking an “irresponsible risk” and accused him of showing “poor, poor judgement.”

In the immediate aftermath of the debate Ladbrokes cut the odds on the Conservatives winning a majority from 4-6 to 8-13.

But in a sign that Mr Cable was probably the winner of the debate his odds on delivering the next Budget – as a Chancellor in a coalition government – were cut from 16-1 to 12-1.

David Williams of Ladbrokes said: “Vince put in the expected wily performance, but Osborne not falling down as some had predicted was a plus point for the Conservatives.”

Mr Cable also won the largest share of the Channel 4 viewers’ cote as the show came to a close. Mr Cable received 36 per cent of the vote, Mr Darling 32 per cent and Mr Osborne 31 per cent.

Britain Crawls Out Of Recession

(Reuters) – BRITAIN only just crept out of an 18-month recession at the end of 2009, suggesting any monetary tightening remains a long way off and raising fears about the prospects for recovery ahead of an election due by June.

The Office for National Statistics said on Tuesday gross domestic product rose by 0.1 percent between October and December, well below analysts’ forecasts for growth of 0.4 percent and lower than all the predictions in a Reuters poll.

For 2009 as a whole, the economy shrank by 4.8 percent — the worst yearly performance since records began in 1949.

The Labour government has been banking on a strong bounce back to growth to help overturn its poor opinion poll ratings before an election expected in 100 days, but these weaker than expected figures make a political comeback even trickier.

“You can see there is a lot of uncertainty and therefore you would expect as you come out of recession for things to fluctuate,” Labour finance minister Alistair Darling said.

“I think we are now on a path to recovery … you need to maintain your support, don’t pull the rug from under our feet at the very time that we can see recovery.”

Sterling fell and gilt futures rose after data, which also showed output fell 3.2 percent from the same period a year ago. From peak to trough, the economy contracted six percent — far worse than the downturns of the early 1980s and 1990s.

For a graphic, click on:

“We know there are significant headwinds in Q1,” said Ross Walker, an economist at RBS Financial Markets. “Overall, the headline is disappointing but actually the underlying picture looks more worrying.”

Most analysts predict the Bank of England will halt its 200 billion pound asset buying programme — designed to pump money into the economy — next month, but Tuesday’s GDP figures are likely to boost expectations that any interest rate rises from the current record low of 0.5 percent are many months away.

Nonetheless, whichever party wins the election will have to enact dramatic fiscal tightening at some point to rein in a record budget deficit, which will be a major drag on growth.

The government has a four-year plan to halve the deficit — set to top 12 percent of GDP this year. But the Conservatives, ahead in opinion polls, say that is inadequate and pledge to start tightening fiscal policy this year, earlier than Labour.

“After this great recession, any signs of growth are welcome,” said Conservative economics spokesman George Osborne.

“We urgently need a new model of economic growth that includes a credible deficit reduction plan that keeps mortgage rates low, creates jobs and doesn’t choke off recovery.”

While Prime Minister Gordon Brown has argued his decisions have helped Britain weather the global storm, the UK is the last of the major economies to exit the downturn.

The latest figures may also increase doubts about the pace of global recovery as Britain is also the first G7 country to report GDP figures for the fourth quarter.

Evidence from the euro zone suggests its economy may have grown at a glacially slow rate in the last quarter of 2009 and the first quarter of this year.

Britain’s recession was the longest on record and policymakers expect a long slog to get the economy back to pre-crisis levels and warn the road to recovery will be rocky.

The Bank has said the extent of any fiscal consolidation will have an impact on monetary policy and analysts say sharp cuts in government spending and big tax rises may result in interest rates having to stay lower for longer to compensate.

Some economists said the preliminary estimates of GDP could be revised upward but there are also concerns about the strength of private demand, which will need to improve greatly to establish a sustainable recovery.

Bank Governor Mervyn King has said stimulus measures and a weaker pound remain the main supports to growth.

National Debt Will Hit £1.5 Trillion

(Telegraph) – BRITAIN’S NATIONAL DEBT will hit £1.5 trillion after the Government was forced to increase its borrowing plans again.

In his pre-Budget report, Alistair Darling, the Chancellor, set out plans to borrow almost £800 billion over six years after the sharpest economic contraction in modern history inflicted more damage on the public finances.

Mr Darling said his plans for tax rises and spending curbs will halve the Government’s annual deficit over four years.

But Treasury figures show that the accumulated stock of outstanding Government debt will go on rising for at least six years.

Figures in the Treasury’s pre-Budget report documents reveal that in 2014/15, the national debt will be £1,473 billion. That is 77.7 per cent of gross domestic product

The debt currently stands at £798 billion, or 55.6 per cent of GDP.

Servicing the Government’s growing debt will cost increasing amounts of money.

Debt interest will cost £30.7 billion this year. That is £3.5 billion more than the Treasury had expected.

Next year, debt interest will be £44.8 billion, a £1.5 billion increase and more than the operating budget of the Ministry of Defence.

Earlier this year, Mr Darling set out plans for the biggest programme of borrowing ever undertaken in peacetime.

Today, the Chancellor admitted that weaker-than-expected growth figures have forced him to raise his deficit figures still further.

In 2009/10, the Government will spend £178 billion more than it raises in tax, Mr Darling said. That is £3 billion more than the record-breaking figure he forecast at the Budget in April, and equal to equal to 12.6 per cent of the entire UK economy.

Next year, borrowing will also be higher, at £176 billion.

In total, from this year until 2014/15, the Government will spend £789 billion more than it raises.

In the Budget in April, Mr Darling said the economy would shrink by 3.5 per cent. Yesterday, he admitted the decline will be 4.75 per cent, the worst since the Second World War.

But when he listed the contractions in other leading economies, he gave the figures for the entire downturn, saying that Germany has shrunk 5.6 per cent and Italy 5.9 per cent.

On the same basis, the “cumulative economic contraction” of the UK is 5.9 per cent.

George Osborne accused Mr Darling of a “sleight of hand” over the figures.

Mr Darling said he is sticking to his forecast of growth next year between 1 per cent and 1.5 per cent. In the following two years, it will be 3.5 per cent, he said.

“I am confident that the UK economy will start to grow again by the turn of the year,” Mr Darling said. “Whilst I am confident that the UK economy is on the road to recovery, we cannot be complacent.”

Treasury officials said the “paper loss” the Government has suffered on its shares in RBS and Lloyds Banking Group was the main cause of the increased borrowing.

Despite the sharp economic slowdown, the Treasury still expects tax revenues this year to be higher than it forecast at the Budget: revenues from stamp duty and VAT have exceeded expectations, as house prices and retail sales have remained robust.

Social security costs are slightly lower than the Treasury expected, because unemployment has not hit 3 million.

Alistair Darling To Target High Earners

Alistair Darling (Telegraph) – HIGH EARNERS HAVE BEEN WARNED by Alistair Darling, the Chancellor, that they will be expected to “bear the greatest burden” of economic recovery in this week’s pre-Budget report.

Mr Darling is considering levying one-off windfall taxes on bank profits and a super-tax on bankers who receive bonuses above a certain level, and indicated that he expected the rich to pay more in tax.

Taxing profits at 10 per cent would bring in around £2 billion this year alone, but while both moves are said to be “on the table,” a final decision ahead of the pre-Budget Report has yet to be taken and the Chancellor has discussed the options with Gordon Brown today.

Mr Darling indicated there would be no back-tracking on the new higher rate of income tax, of 50p on earnings of more than £150,000, to be introduced from next April.

Amid warnings from business groups about the impact of hefty tax rises on the people he needs to drive growth, he is thought to have resisted calls to extend the rate to those earning £100,000 or more.

David Frost, director general of the British Chambers of Commerce said raising taxes on middle and high earners would be “enormously damaging” for Britain at a time when it needs talented people to drive an economic recovery.

“The very people we need in this country to create wealth could be located anywhere and will simply go somewhere else.

“Taxes above 50 per cent would be hugely harmful for the UK. This is the very time that we need as much business in the UK as possible.”

However, with borrowing expected to reach £180 billion, the highest level since the Second World War, Mr Darling warned that the rich would have to expect tax rises, saying: “You would expect the broadest shoulders to bear the greatest burden.”

Any windfall levy on banks’ profits would be designed to apply not just to UK banks such as the Royal Bank of Scotland and Barclays, but also to the British arms of global firms including JP Morgan and Deutsche Bank.

The decision has gone to the wire, however, as officials have been clashing over the legality and administrative complexity of the plans.

Mr Darling is considering two versions of a tax on bonuses, which are predicted to reach £6 billion this year despite the recession. The first would be a levy on payouts above a certain rate, the alternative would be a substantial increases in national insurance charges for banks which pay bonuses.

Mr Darling is said to be tempted to exploit voter anger at bankers awarding themselves large bonuses so soon after being bailed out by the tax payer.

The City has warned that the move would hamper the ability of institutions such as the Royal Bank of Scotland to attract the talent needed to restore balance sheets and ultimately delay banks’ ability to pay off the taxpayer loans and return to the private sector.

George Osborne, the shadow chancellor, said that he was not opposed to a banking windfall tax in principle, but that the Tories would focus on taking steps to stop banks offsetting losses against future tax bills once they began to make profits.

Vince Cable, the Liberal Democrat Treasury spokesman, accused both parties of a “lack of clarity”

The Daily Telegraph also understands that this Wednesday’s pre-Budget report will see the inheritance tax threshold frozen at £325,000, with plans to raise it to £350,000 cancelled.

This would allow Mr Brown to continue his strategy of accusing the Tories of seeking to deliver tax breaks for the wealthy. The Conservatives are committed to raising the threshold at which tax must be paid to £1 million.

However, Mr Osborne, disclosed that the impact of the recession meant that a Tory government would not legislate to raise the threshold for the first “year or two” in office. He said: “This country is virtually bust.”

KPMG have suggested that the Government might seek to levy a new 50 per cent inheritance band on estates worth more than £1 million.

However, Mr Darling refused to respond to predictions that he would use the PBR to “soak the rich”.

Accountants BDO had predicted that Mr Darling would raise the rate at which profits on capital investments are taxed from 18 per cent to 20 per cent. They suggested that there could even be a new Capital Gains Tax rate of 40 per cent on short term gains.

Ernst and Young forecast that he could introduce a new 60 per cent band for those earning more than £500,000 a year, raising an extra £2 billion annually.

Meanwhile, the accountants Grant Thornton suggested that an extra 70,000 people a year could to be dragged up into the 40 per cent tax bracket if Mr Darling froze the personal allowance on which no tax is due, even though average earnings rose 1.2 per cent.

Mr Darling is understood to be keen to give Labour ammunition with which to fight at the next election by painting the PBR as an equality budget.

He told the BBC’s Andrew Marr show: “It wouldn’t be right to be giving further tax breaks to people at the very top.”

Mr Darling said: “We are not going to be held to ransom by people who believe you can pay extraordinarily high bonuses without regard to what’s going on.”

The Chancellor warned of tough times ahead, saying: “On Wednesday I will set out what I think we need to do. That will involve some very difficult choices,” he said.

“It will mean making public spending much tighter.”

Tomorrow, ministers will make clear that high earners in the public as well as the private sector be made to bear the costs of the recession, with as many as one in five senior civil servants to lose their jobs.

In a speech, Mr Brown will promise £12 billion in efficiency savings across Whitehall, including £100 million a year from staff costs.

Mr Darling is likely to announce that some departmental budgets will face cuts of as much as 20 per cent while frontline services such as cancer care and teaching are protected.

As a first step, he disclosed that plans for a multi-billion pound super computer for the National Health Service would be cancelled.

Incentives and stimulus measures will continue, with Mr Darling poised to announce a new scrappage scheme, based on that for old cars, with households being paid £300 to trade in old boilers for new green models.

There will also be more money for jobs, after Yvette Cooper, the Work and Pensions secretary, disclosed that unemployment would continue to rise next year, above the current level of 2.5 million.

David Cameron And Shadow Cabinet Referred To Sleaze Watchdog Over Expenses

(Telegraph) – DAVID CAMERON AND 10 OTHER MEMBERS OF THE SHADOW CABINET have been referred to the Westminster sleaze watchdog after using Parliamentary expenses to make payments to their constituency associations.

A Labour MP has written to John Lyon, the Parliamentary Commissioner for Standards, asking him to investigate thousands of pounds in fees charged by local parties and claimed back on the MPs’ expenses.

Receipts filed with allowances claimed by a number of shadow cabinet ministers list the payments as having been made to ‘constituency worker,’ ‘constituency secretary,’ ‘secretarial and office services’ and ‘surgery.’

The receipts, usually for around £3,000 a year, appear in the MPs’ Incidental Expenses Provision allowances dating back over the last five years.

John Mann, the MP for Bassetlaw, has lodged a formal complaint with the Parliamentary watchdog saying that the payments raised concerns over whether national insurance was paid and the stated work actually carried out.

MPs are barred from using their expenses to fund their party political campaign work.

In total, 11 Tory front benchers, including George Osborne, the shadow chancellor, William Hague, the shadow foreign secretary, Chris Grayling, the shadow home secretary, and Eric Pickles, the Conservative Party Chairman, have been reported to the commissioner.

The payments ranged from £9 to £32 an hour paid by Theresa May, the shadow work and pensions secretary, for a staff member to attend a surgery in her Maidenhead constituency, during which, she said, they worked: ‘arranging appointments, receiving and making calls.’

In his letter to Mr Lyons, Mr Mann said that he understood that a number of Conservative MPs had the permission of the now discredited Commons fees office to make the payments.

He added: ‘I believe there are a number of issues that need to be addressed in the light of this practice.

‘Paying staff out of the IEP means that no national insurance number is required and no national insurance is paid; and without formal staffing arrangements, such as a contract, there is no way of determining what work has been carried out.

‘Moreover, whilst the annual amount paid to local parties is around £3,000 for staffing, the hourly rate for staff varies from as little as £9 per hour to as much as £32.58 an hour, as does the number of hours worked.

‘Finally, there is no means of determining whether staff have indeed been paid, as payments from the IEP are made directly to local Conservative Associations.

‘I am, therefore, concerned that what appears to be the payment for reasonable expenses incurred in the cause of carrying out Parliamentary duties maybe seen as a way of directing public money to a local political party.’

A Conservative spokesman said that all of the payments were in order, adding that MPs of all parties, including many Labour MPs, used their Parliamentary expenses to pay for staff and other support in their constituencies.

He added: ‘These payments reflect genuine costs incurred by MPs in performing their parliamentary duties in their constituencies. The arrangements were, of course, fully disclosed to the fees office, and have been approved by them.’

Other members of the shadow cabinet reported to Mr Lyons include Dominic Grieve, the shadow justice secretary, Michael Gove, the shadow children’s secretary, Sir George Young, the shadow leader of the House, Andrew Mitchell, the shadow international development secretary, and Theresa Villiers, the shadow transport secretary.

Recession Lingers As Economy Contracts

(Reuters) – THE ECONOMY CONTRACTED IN THE THIRD QUARTER of this year, quashing hopes the downturn was ending and instead marking the longest recession on record.

The pound plunged more than a cent against the dollar and government bonds surged as traders and analysts bet the Bank of England was more likely to expand its quantitative easing program of buying up debt market assets to secure a recovery.

Friday’s figures are also a blow to Prime Minister Gordon Brown’s Labour government, trailing in opinion polls and hoping for recovery to take hold well before an election due by next June.

The Office for National Statistics said the gross domestic product fell by 0.4% between July and September, meaning the economy has contracted for six successive quarters for the first time since records began in 1955.

This was much worse than analysts’ expectations of a 0.2% rise. Not a single analyst out of the 35 polled by Reuters before the data had predicted a negative reading.

‘Third quarter GDP is awful, with no positive news within the report,’ said James Knightley, economist at ING.

‘More worryingly from sterling’s perspective is the fact that the UK may be the only major economy to have contracted in the third quarter.’

Japan, Germany and France all pulled out of recession in the second quarter and economists expect the United States to have returned to growth in the third.

The data will pose a major challenge for the Bank when it reviews its growth and inflation forecasts in early November and analysts remain divided over whether the bank will expand its £175 billion quantitative easing scheme.

August’s forecasts showed the Bank would meet its inflation target over the medium term; but this was based on an annual economic decline of only 4.6% in Q3. Friday’s figures show a 5.2% fall, only marginally better than the record 5.5% annual fall registered in the second quarter.

‘It’s fair to say that these figures might be an argument that the Bank of England will be using to expand QE… It clearly tilts the balance in favour of those who wish to expand the program,’ said Commerzbank economist Peter Dixon.

Chancellor Alistair Darling said he still expected growth to return by the turn of the year, reiterating a forecast made in the budget in April. Darling will update that forecast in the pre-Budget report due in the next few weeks.

‘We’re facing the worst global financial crisis and recession in 60 years,’ he said. ‘That’s all the more reason to continue the action the government is taking. To remove it now would be madness.’

But Darling’s Conservative counterpart, George Osborne, said Germany and France’s better economic performance showed government policy had failed.

‘We now know that Gordon Brown’s recession plan has not worked, and this news has destroyed Labour’s claim that Britain was better placed than other countries to weather the storms.’

The ONS said there had been a peak-to-trough GDP fall of 5.9% during the current recession, compared to 6.0% between the second quarter of 1979 and the first quarter of 1981 — a period when there were some quarters of growth.

The quarterly decline between April and June was unrevised at 0.6%.

Analysts had been pinning their hopes for recovery on months of survey evidence that had pointed to a sharp rise in confidence and activity in the services sector, which makes up three quarters of Britain’s economy.

But services contracted by 0.2% over the quarter, with the distribution, hotels and catering sub-sector leading the decline with a 1.0% quarterly drop.

Economists had already expected industrial output to be weak, following a sharp monthly drop in August, and the GDP data bore this out. Industrial production fell by 0.7% over the quarter, taking its annual decline to 10.4%.