Budget: Osborne announces ‘tough but fair’ Budget

CHANCELLOR George Osborne took an axe to Government spending, public sector pay and pensions and raised VAT 2.5% in an Emergency Budget of “tough choices”.

Capital gains taxes are also going up, as expected, by 10% to 28% for higher-rate taxpayers, while from next January a levy will be imposed on banks and building societies, which will raise £2bn a year.

In what was an assured performance during a 54-minute-long speech before a packed house, George Osborne promised “decisive action to deal with the debts we inherited,” but support for business and entrepreneurs.

He said that 77% of savings made in the Budget would come from spending cuts, 23% from tax rises.  Government departments face cuts of 25% over the next five years with the welfare bill alone slashed by £11bn over the next five years.
The Chancellor pledged to wipe out Britain’s record deficit within five years as he announced extra spending cuts worth £30bn a year.

It what was billed as the toughest budget for a generation, he said the country’s finances would be balanced by 2015/16  by spending less and increasing the tax take.

Stressing the need for a private sector led-recovery, the Chancellor announced National Insurance relief for people starting businesses outside London and the South East in a bid to rebalance the nation’s economy.

Corporation taxes will be reduced to make Britain a more competitive location for business, Mr Osborne said.

Small companies’ corporation tax will be cut to 20% next year. Corporation tax will be cut by 1% per year for four years from next year, bringing it down to 24%.

He said workers in the public sector had to share the pain felt by many in the public sector, who have had to take wage cuts or pay freezes.

To this end there will be a two-year pay freeze for public sector workers, although the 1.7 million lowest paid will get a flat £250 pay rise.

Despite the feared hike in Capital Gains Tax, it wasn’t all bad news for entrepreneurs and wealth creators, as Mr Osborne said the 10% capital gains tax rate for entrepreneurs – which currently applies to the first £2m in qualifying gains – will be extended to the first £5m.

Mr Osborne said the coalition government was planning for a sustainable private sector based on economic growth, rather than “pumping the debt bubble back up”.

Everyone would be asked to contribute to reducing the record deficit, but pledged that all would “share in the rewards when we succeed”.

“I’m not going to hide hard choices from the British people or bury them in the small print of the Budget document,” he added.

Stephen Sandys, director of Ernst & Young in Birmingham, said: “In terms of overall cuts, I was pleased to see that he confirmed he was adhering to this 80/20 rule primarily by focussing on cutting spending rather than by increasing taxes.

“My personal view is that this is the right approach and that’s supported by the Ernst & Young ITEM Club of economic commentators. It’s a widely-held view that this has been successful in the reducing deficits.

“CGT rate has not been raised as high as one might have feared or expected.

“The reason for that not coming to pass is that he seems to have listened to the view that if you rise it too high people don’t sell their assets and the amount of tax you get starts to fall.”

Hetal Mehta, senior economic advisor to the Ernst & Young ITEM Club, said: “This package is much tighter than most had envisaged, with an extra tightening worth £40bn a year by the end of the Parliament on top of the £44bn built into the previous government’s fiscal plan. We feel that the objective to eliminate the cyclically-adjusted current deficit by 2014-15 is quite ambitious, but commendable.
 
“With fiscal policy much tighter, one would expect a slower economic expansion, which is what the revised OBR projections show. This consistency is heartening and safeguards the credibility of the new framework. The pace of tightening announced should placate the markets.
 
“However, while the overall borrowing projections give us an idea of how fast the government intends to tighten policy in the coming years, without the publication of the Departmental Expenditure Limits, it is difficult to assess the credibility of that intention. Most departments will face a 25% cut, while others, notably health and education are likely to fare better, but we cannot say for sure at this stage.
 
“Overall, it was a well crafted and balanced Budget.”

• Budget: At a glance
• Budget: Public sector loses out to the 80:20 principle
• Budget: Cheer for those on state pension
• Budget: Hopes boosted for manufacturing-led recovery
• Budget: OBR underestimates fiscal tightening – ITEM Club
• Budget: Welcomes and warnings from property sector
• Budget: Entrepreneurs ‘can earn more’ says Chancellor
• Budget: Entrepreneurs ‘can earn more’ says Chancellor
• Budget: Levy on banks to raise £2bn a year 
• Budget: Sigh of relief at caution on CGT