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A Take on the Budget

Allan Bisset

Chancellor George Osborne's first Budget has been delivered.  It’s pretty much what was expected and represents measures that would have to be implemented no matter who was in power really. Even so, in order to get the deficit under control, the government has chosen to put more weight on spending cuts (77%) rather than opt for tax rises.  Usual caveats:  this reflects my own opinions and information as at this date and does not necessarily represent the views of Fresh Egg Limited, but here we go:

VAT Man & Business Man

The first big surprise is not so much the increase in the rate of VAT – it was widely trailed to go up to around 20% by many commentators - but most assumed it would come into effect in April next year.    The fact that VAT will rise from 17.5% to 20% from January 4th 2011 is getting the pain (and the revenue) in early and a marker of intention.  Capital Gains Tax remains at 18% for low and middle-income savers but from midnight, higher rate taxpayers will pay 28%.   The capital gains tax "entrepreneur’s relief" rate of 10% is to be extended to the first £5 million (more than double what it was).   The threshold at which employers start to pay National Insurance will rise by £21 per week, above indexation as from April 2011 and Corporation Tax will be cut next year to 27% - and then progressively by 1% annually for the next three years until it reaches 24%.  Small companies' tax rate will be cut to 20%. People setting up new businesses outside London, the South East and the east of England will be exempt from £5,000 of National Insurance payments for the first 10 workers.

Fast Broadband Roll Out

Probably most significant from an Internet Marketing perspective is the fact that the “landline tax" to fund the rollout of fast broadband has been scrapped.  Instead the government will support private investment partly funded by the digital switchover under-spend within the TV licence fee and trying to persuade gas and electricity companies to give access to their already established duct network.    Tax relief for the video games industry is also to be scrapped.

Public Sector Pain

It’s the public sector that really gets hammered in this budget though.  The shock for many commentators was the size of the average real terms budget cuts planned for the state sector of 25% over four years.  Health and international aid are the only budgets ring-fenced, so departmental cuts of around £17 billion  by 2014-15 will have to come from Education and the rest.  Public sector workers face a two-year pay freeze, although 1.7 million earning less than £21,000 will get a flat pay-rise worth £250 in both years. Personal income tax allowance thresholds will also be increased by £1,000 in April to £7,475.00, so almost 900,000 of the lowest-paid could be taken out of income tax altogether.  The basic state pension will be linked to earnings from April 2011, with the pension guaranteed to rise in line with earnings, prices or 2.5%, whichever is the greater - but we’ll all be expected to work until we’re 66 years old.

Duties & Benefits

Perhaps surprisingly, the Chancellor has resisted the temptation to make any changes to the rates of duty on cigarettes, alcohol and fuel.   Benefits have been a far more attractive target, with child benefit frozen for the next three years, tax credits reduced for families earning over £40,000 next year, the health in pregnancy grant abolished from April 2011, the Sure Start maternity grant  restricted to the first child and lone parents expected to look for work when their youngest child goes to school.  From 2011, benefits, tax credits and public service pensions will rise in line with the Consumer Price Index instead of the Retail Price Index, saving over £6 billion a year - the state pension and pension credit will still be linked to the RPI.   Receipt of DLA (Disability Living Allowance) will be subject to a medical assessment from 2013 for new and existing claimants. In all, it’s hoped that this assualt on welfare payments will save £11 billion by 2014/15.

The Banks

The banks (you remember – the people who got us into this mess in the first place) get away with what amounts to a slight tap on the wrist.  A bank levy that will apply to the balance sheets of UK banks and building societies and UK operations of foreign banks (“smaller” banks don’t have to pay at all) will come into force from January 2011.  This less than draconian measure will raise a paltry £2 billion a year.

The UK Economy

The UK's growth forecast is revised down from 2.6% to 2.3% in 2011 while the overall UK economy is predicted to grow by 1.2 % this year, 2.3% in 2011, 2.8% in 2012, 2.9% in 2013 and 2.7% in both 2014 and in 2015.   Debt will peak in 2013/14 at 70% of GDP. Unemployment is forecast to peak this year at 8.1% and then fall for each of the next four years to bottom out 6.1% in 2015.

Welcome to Austerity UK everyone!

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