Emergency Budget - June 2010

[Saracen]

This thread is for the measures in the Emergency Budget. No doubt people will comment, but I'll try to keep the first post updated with major measures.

Firstly, the Chancellor sets the context - the debt, as a % of GDP, will be falling over the course of the Parliament. Note, the debt will be falling, not just the deficit. That suggests that a combination of increased taxation, reduced spending and growth haver to eliminate the deficit because only then will the underlying debt start to drop.

The question is .... how?

OBR projections:
- growth over next five years as 1.2% this year, then 2.3%, 2.8%, 2.9% 2.7% 2.7%
- consumer price inflation 2.7% by end of year, before returning to target, which remains 2% by CPI
- unemployment rate to peak this year at 8.1%, then fall for each of the next 4 years, to 6.1% on 2015


Budget measures

The bulk of reduction to come from lower spending, not higher taxation. The ratio on in budget measures is 77% from spending reductions, and 23% from tax rises.

As share of the economy, borrowing falls from 10.1% of GDP this year, to 1.1% in 2015/16.

Public sector net borrowing £149bn this year, then £116bn, £89bn, £60bn, £37bn, in 2015/15 to £20bn.

Structural current deficit currently significantly "larger than we were told", 0.8% of GDP. Due to budget measures, Structural current balance will be -4.8% this year, which will be eliminated to +.0% in 2014/15, and +0.8% in 2015/16, i.e. in surplus.

Because of these measures, debt interest payments will be £3bn per year lower by end of Parliament than they would have been.

Debt interest payments alone will cost the taxpayer a quarter of a trillion pounds, that's £250 billion, over this Parliament.

This government will not be joining the Euro this Parliament (no kidding! l)) so the Treasury's "Euro Preparation Unit" has been abolished, and the "official concerned" has been redeployed.

Government expenditure to rise from £637bn this year to £711bn by 2015/16. Compared to Labour plans announced, there will be £30bn additional current expenditure reductions per year by 2014/15.

There will be no further reductions in capital spending budgets in this budget, because capital investment is important for growth, but great care will be given to how those budgets are spent. The "absolute priority" will be projects with "significant economic return to the country", and assessing what those projects are will be an essential part of the Autumn spending review.

Some assets will be sold. The sale of High Speed 1 has already been announced, and the sale of the shareholding of Air Traffic system NATS is to be looked at. The aim is to sell the student loan book, and options for early repayment for individual considered. The future of the Tote is to be resolved.

The Civil List has remained unchanged over the last 20 years at £7.9m, and is now worth 25% of what it was 20 years ago. With the full agreement of the Queen, the Civil List will remain frozen at this figure. The Royal Household have agreed that in future, civil list expenditure will be subject to the same audit scrutiny as other government spending, through the NAO and Public Accounts Committee of the Commons.


Departmental Expenditure Limits

Labour plans were to cut departmental budgets by £44bn by 2014/15. This implies an average real reduction for unprotected departments of 20%.

Because the structural deficit is worse than Labour admitted, the budget implies further cuts of £17bn by 2014/15. Because International Aid obligations will be honoured, and NHS will be receiving real terms increases throughout the Parliament. Therefore other departments will face an average real cut of around 25%, over 4 years. If additional savings to social security and welfare, above those to be announced, can be found, then that 25% may be subject to revision downwards. In other words, it's not cuts they want, but cuts they have to make.

Not all departments will receive the same settlement, and in particular, pressures on education and defence are recognised. Actual departmental settlements will be in the spending review, which will be on October 20th.

Public sector pay and Pensions

It is noted that the public sector did not cause the recession, but the private sector has borne the brunt of the pain so far, with pay cuts, reduced hours, pension rights reduced and job losses, because the alternative was often even larger job losses.

The public sector now faces a similar trade-off. A public sector pay freeze is expected for two years, but the lowest paid 1.7 million workers, or 28% of public sector workforce, on under £21,000 will be excluded from the freeze. They will receive a flat £250 pay rise in each of these 2 years, so the very poorest paid will get a proportionately larger rise. Will Hutton is to conduct a pay review, without affecting overall pay bill, to reduce the gap between highest and lowest paid in public sector, so that highest earners get no more than 20x that of the lowest.

The culture of excessive pay at the very top of the public sector simply has to end.

By 2015, as per the OBR, there will be a gap of £10bn/year between pension contributions and the unfounded pensions they support. John Hutton (ex Labour Work and Pensions Secretary) is to carry out an investigation, as he brings experience and an unbiased view.

Welfare

Germany has already announced 30 billion Euro cuts in their welfare spending, and many other countries have done similar. Our welfare spending has increased, in real terms, by 45% in the last decade and is a major contributor to the structural deficit.

Some unaffordable one-off payments to be ended, and welfare is to be focussed on those really in need, with greater incentives to work, and less incentives not to.

From next year, except for state pension and pension credit, benefits, tax credits and public service pensions will be upgraded in line with the CPI, not RPI. This will save over £6bn a year by end of Parliament. This is a fairer approach than a benefits freeze.

Tax credits have increased from £18bn in 2003 to £30bn this year, and is unsustainable. There are over 150,000 families with incomes over £50,000 receiving tax credits, and in all, families earning up to £83,000 are eligible for this means-tested benefit. A series of adjustments will be made to threshold, taper reliefs and backdating of payments, as well as reducing eligibility for the better off.

Health in pregnancy grant abolished from April 2011. Surestart maternity grant restricted to first child only at same time. Lone parents to look for work when youngest child goes to school.

Child benefit. Means testing would require massive new assessment system. Taxing it would mean working mothers receive less than non-working partners of higher earners, and neither is fair. So to control costs, child benefit will be frozen for the next three years.

Disability Living Allowance

Rate will not be reduced, because it is right that the disabled are supported in a life of dignity. But three times as many people claim it as when it was introduced 18 years ago. and the costs have quadrupled in real terms. to over £11bn a year.

A medical assessment for DLA introduced from 2013, for new and existing claimants. It will be simpler than the current complex forms. It will therefore be paid to those with the greatest need, while improving incentive to work for those that can.

Housing Benefit

Costs risen from £14bn 10 years ago, to £21bn today, which is nearly 50% increase over and above inflation. We now spend more on housing benefit than the police and universities combined. There are some families receiving £104,000 a year in housing benefit, and the cost of one such award is the total income tax and NI payments of 16 workers on median pay. Local housing allowances will be restricted and reset, uprating deductions, reducing certain awards, readjusting support for mortgage interest payments, limiting to appropriately sized homes and introduce maximum limits for the first time, to £280/week for a 1-bed property, to £400/week for 4-bed or larger. This reduces total bill by £1.8bn per year. Discretionary budgets for hardship cases will be increased, and the cost of an additional room for claimants that need a carer will now be covered.


Encouraging Growth

From April 2011, threshold for employers NI to rise by £21/week over indexation. This reduces the employers bill and encourages job creation. The cost of hiring staff on under £20k will be less than it is today.

We need growth in all industry sectors, and all regions.

Corporation tax cut 28% to 27% next year, and a further 1% per year in subsequent years, to 24% eventually. This is to increase attractiveness of UK internationally. It will be the lowest rate of major Western economies, lowest in the G20, and the lowest rate this country has ever known. A long-term approach to taxation of foreign profits will be agreed, treatment if intellectual property and proposals from James Dyson on R&D.

Small Companies tax rate will be decreased. Labour were planning to increase it to 22%. Tory will cut it to 20%, benefiting some 800,000 small businesses. Enterprise Finance Guarantee Scheme extended. Favourable rules for furnished holiday letting reinstated, to help small businesses in tourism. Some backdated business rate bills to be cancelled.

Poorly targeted reduction in tax relief for video games industry cancelled. A small reduction in rates for capital allowances, which will be broadly in line with economic depreciation. Shorter term items fall from 20% to 18%, and longer terms ones from 10% to 8%. In other words, expenditure still qualified, but over longer time periods. These are deferred to April 2012 to avoid hindering recovery.

Banking

Banks to make an more appropriate contribution. From Jan 2011, a bank levy applies to balance sheets of UK banks and building societies, and to UK operations of foreign banks. There will be deductions for Tier 1 capital and insured retail deposits, and a lower rate for longer maturity funding. Smaller banks with lower liabilities will be excluded from the levy. This will raise over £2bn annually, once in place.

France and Germany have introduced similar measures today, jointly.



Investment and Regions

Green investment bank to go ahead, and digital infrastructure, to be assisted. But landline duty abandoned before it is implemented.

Between 1998 and 2008, for every private sector job created in the North, 10 were created in London and the South. A new approach is need, encouraging local economic growth and job creation in all parts of the country, including Wales and Scotland.

A series of regional transport projects are to go ahead, such as Tyne and Wear metro, extension of Manchester metro link, redevelopment of Birmingham New Street station and improvements to rail lines to Sheffield, and between Liverpool and Leeds.

A large regional growth fund is to be created providing capital for regional capital projects. Details to be announced later, but emphasis is on potential for growth and job creation.

Also, a new tax scheme to help create businesses in areas where the private sector is not strong enough (i.e. North, Scotland, and NI, I presume). For the next three years, anyone setting up a new business outside of London, the south East and the East will be exempt from up to £5000 of employer's NI, for each of the first 10 employees.

Taxation

The sovereign debt crisis means the deficit needs to be reduced. This means tax rises.

VAT goes from 17.5% to 20% on 4th January 2011. This will raise £13bn by end of Parliament. Everyday essentials like food and children's clothing, as well as books and magazines and other zero rated items will stay zero rated for life of Parliament.

No new duties in alcohol, tobacco and fuel, after large rises in last budget.

Labour's planned cider charges are reversed.

Council Tax .... A deal for local councils .... keep costs low, and central government will help them freeze Council Tax for one year. The average family will be £25 better off next year. and every year thereafter.

Capital Gains Tax .... low and middle income savers who basic rate IT taxpayers will continue to pay CGT at 18%. Higher rate taxpayers will pay at 28% as of midnight. CGT exempt amount remains at £10,100 and rises with inflation in subsequent years.

CGT rate for entrepreneurs remains at 10%, but the limit of £2million in qualifying gains over a lifetime is extended to £5 million.

The Treasury predictions are that going over 28% on CGT would result in lower receipts, not higher.

Income Tax.

Basic PA (under 65's) is £6475. Many people get income taken away in tax, only to have to apply to get it back in benefits. This does not reward work.

PAs to go up by £1000 in April, to £7475. 880,000 of the lowest earning taxpayers will be taken out of the IT tax system, and 23 million basic rate taxpayers will each gain by up to £170 a year.

Higher rate threshold will be frozen until 2013/14, and they will not gain from these changes.

Further steps to get basic rate PA to £10,000 remains the objective, and further steps will be taken over the Parliament.


Help for Pensioners

Basic state pension relinked to earnings from April next year. This was abolished during last Tory government, and never reinstated in 13 years of Labour government.

It is protecxted by a triple lock, rising in line with :-

- earnings, or
- prices, or
- by 2.5% ...

.... whichever is the greater. There will be no more "75p increases".

Child element of Child tax credit increased by £150 above indexation next year. This is a £2bn spend on low income families.

[Terbinator]

Increased VAT and stalling of benefit increases for 3 years.

[pp05]

Selling the student loans book.

[oolon]

Two year public sector pay freeze, lowest payed people will get 250 quid flat increase for the 1.7 million lowest paid.

Edit

Two-year pay freeze for public sector workers earning more than £21,000

[dave87]

The question is .... how?

Creative accounting and gaffer tape.



In all seriousness, I cannot see a way out of the hole we've dug (and I say we - because ultimately it was the voting public that ended up giving Labour so much time to screw it up) without fairly dramatic tax increases. That said, I think they will be implemented gradually, as otherwise the shock to the economy would remove any advantages of raising taxes.

VAT increases have been mooted, as have another band of income tax - but I also think the efficiency savings element should not be overlooked - ie Child Tax credits. To me that is the government taking money from people who should have it, calculating what they should get back, then giving it back to them minus the transaction costs. Surely an increase in the basic tax allowance for families would work to the same end, but without the bureaucratic costs? Same goes for JSA/Benefits - an overhaul of the system there is in drastic need - to reduce administration costs and to make sure the people who should be getting benefits are, and those that shouldn't, aren't.

The other problem is the more you increase tax, the more incentive there is to avoid it (and minimise your tax liabilities) or, for the less scrupulous, evade it, and as such collection costs and net benefit to reducing the deficit decreases. The only way to avoid that is to load it onto VAT for example, which is slightly more challenging than Income Tax/Capital Gains tax etc. to avoid.

But I shall wait with baited breath before preparing to be utterly rogered as a contributing member of society

[oolon]

Child Benefit frozen not cut. Everyone with a kid still gets it!

[oolon]

Vat going to 20%

Edit:

This is not a temporary one year thing. Time to buy that new computer and flat screen this year!

[cptwhite_uk]

....from 4 Jan 2011.

[petercook7]

Vat going to 20%

i was expecting that, thought they'll implement it by July, did he say if it was s temporary measure?

[petercook7]

Creative accounting and gaffer tape.



In all seriousness, I cannot see a way out of the hole we've dug (and I say we - because ultimately it was the voting public that ended up giving Labour so much time to screw it up) without fairly dramatic tax increases. That said, I think they will be implemented gradually, as otherwise the shock to the economy would remove any advantages of raising taxes.

VAT increases have been mooted, as have another band of income tax - but I also think the efficiency savings element should not be overlooked - ie Child Tax credits. To me that is the government taking money from people who should have it, calculating what they should get back, then giving it back to them minus the transaction costs. Surely an increase in the basic tax allowance for families would work to the same end, but without the bureaucratic costs? Same goes for JSA/Benefits - an overhaul of the system there is in drastic need - to reduce administration costs and to make sure the people who should be getting benefits are, and those that shouldn't, aren't.

The other problem is the more you increase tax, the more incentive there is to avoid it (and minimise your tax liabilities) or, for the less scrupulous, evade it, and as such collection costs and net benefit to reducing the deficit decreases. The only way to avoid that is to load it onto VAT for example, which is slightly more challenging than Income Tax/Capital Gains tax etc. to avoid.

But I shall wait with baited breath before preparing to be utterly rogered as a contributing member of society

i would eliminate tax credits, its unfair.

[Flash477]

I think that it is good that the government is reducing spending in its departments as a large chunk of saving money - but who are going to be managing these cuts?

The problem with the government is too many chiefs and not enough indians - if it is up to each department to manage their own cuts then there are still going to be too many chiefs, and probably a lot fewer indians!

[pauldarkside]

The problem with the government is too many chefs and not enough indians - if it is up to each department to manage their own cuts then there are still going to be too many chefs, and probably a lot fewer indians!

They still need chefs to cook the books though

[Flash477]

They still need chefs to cook the books though

Doh! Corrected