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Emergency Budget 2010
22 June 2010

George’s Marvellous Medicine?

We knew it was coming and we knew it was going to be painful, yet the new Chancellor, George Osborne, still managed to throw in a few surprises in his first Budget for the coalition government.

The UK economy is in a desperate state, we are currently predicted to borrow £149 billion in this year, over and above what we generate in revenue. The prediction is that interest payments over the next five years will total £¼ trillion. Therefore, it is no surprise that the Budget seeks to reduce the deficit.

The Chancellor announced that 77% of the money to be raised will be in the form of spending cuts, with 23% coming from tax rises. In terms of spending cuts, they came thick and fast during his speech.

There was a general 25% spending cut across unprotected government departments over a four year period, reductions in families eligible for tax credits, a cap on the amount of housing benefit that can be claimed, a freeze on child benefit for three years, axing of the health in pregnancy grant and a restriction to the Surestart allowance, so that it only benefits on the first child.

In addition, there is to be a two year pay freeze for public sector workers, although those on salaries under £21,000 will be given nominal pay rises each year, whilst the Royal family’s civil list payments are also to be frozen and future spending reviewed by
the National Audit Office.

The big tax change came with a rise in VAT to 20% from 4 January 2011. This came as no great shock, given the amount of press coverage it had been given in the lead up to this Budget. Coupled with the benefit reductions, this could have a significant impact on lower earning families.

This in part was offset by a £1,000 increase in personal allowances to £7,475, which goes some way towards the Liberal Democrats manifesto of raising allowances to £10,000.

In a boost to business, the small and main corporation tax rates are to decrease by 1% from April 2011, with a continual 1% reduction in the main rate over the following three years, bringing it down to 24% by 2014.

It was not all positive news for business, with a reduction in capital allowances from 20% to 18% and a significant reduction in the Annual Investment Allowance, which provides 100% relief, from £100,000 to £25,000, although this does not alter the overall tax relief, just the timing. Both of these measures are to be introduced in 2012.

Capital gains tax was the other area that was always going to be affected, and an increase in the rate from 18% to 28% for higher rate taxpayers was a reasonable middle ground for the Chancellor. The Entrepreneurs’ Relief limit was further extended from £2m to £5m, both measures taking effect from 23 June.

When looking at the numbers, this Budget is expected to generate approximately £120 billion over the next five years. This compares to the previous Budget in March where the prediction was to spend a net £1.0 billion over the same period, representing a swing of £121 billion!

The Coalition Government stated that they would tackle the deficit, and this is certainly what they seem to be doing. There is undoubtedly a concern that this period of austerity will cause the UK economy to regress, but it is hoped that the boost for businesses will help to avoid that.

It would seem as though it is a case of getting the painful bit out of the way early in this parliament, hopefully this is the same logic currently being deployed by the England football team!
 
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Nick Haines - Partner Nick Haines
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