George Osborne’s Emergency Budget reviewed

Tuesday, June 22, 2010 | Posted by: Richard Jameson
Categories: Business | Tags: entrepreneurs, economy, capital gains tax, CGT, income tax, Richard Jameson, VAT, budget, relief, George Osborne, deficit, budget2010, NICs, personal allowance

Tax hikes announced with more spending cuts and blood-letting to follow in the autumn – that’s how Chancellor George Osborne’s intends to balance the books with today’s Emergency Budget. But what didn’t he mention?

Today, George Osborne announced that he intends to reduce the structural budget deficit in the ratio of 80% spending cuts to 20% tax rises. This provides some clarity on where the axe will fall. We also heard about the new tax measures to achieve this and an outline of the spending cuts, the details of which will be announced in the autumn Spending Review already announced to appear on 20 October 2010.

The foundations of the Coalition’s first Budget provided a change in emphasis: out went the former, discredited ‘golden rule’ and the ‘sustainable investment rule’, and in came forecasts from the newly formed and independent Office for Budget Responsibility.

The blame for the content of the Budget was laid firmly at the door of the previous government. But despite the austere tone of the measures and the seriousness of the announcements, there were a couple of moments of light-heartedness – mainly at the expense of the two former chancellors.

Compared to the past, surprisingly few details of the Budget had been previously confirmed or leaked to the media, but enough of the changes announced had been touted as possibilities, so it did not leave too many people surprised.

The main tax-raising measure will be a 2.5% rise in VAT from 4 January 2011. This measure is expected to raise approximately £12 billion to £13 billion each year. What was not discussed was whether this hike in VAT could lead to inflationary pressures in the future, and if it will hit consumers’ discretionary spending power.

The increase in the income tax personal allowance will please lower earners but any benefit for workers earning approximately £20,000 will be offset by the increase in employee’s and self-employed national insurance contributions (NICs) which had already been announced to take effect from next April. Higher rate taxpayers will also be worse off given the NIC increase.

Finally, a rise in Capital Gains Tax (CGT) was announced with effect from midnight on 23 June 2010. The CGT rate will remain at 18% for basic rate taxpayers, and will rise to 28% for higher rate taxpayers. The allowance for Entrepreneurs’ Relief has been increased to £5 million. This keeps the effective rate for qualifying capital gains at 10% for those who qualify for the relief.

Generally, while there are tax reliefs for various investment and enterprise, the more affluent will bear a larger proportion of the tax increases than other income groups. The Government has also stated that it plans to review the taxation of non-domiciled individuals, but no further details were announced.

Today the new Government set out its stall and it is clear that there is pain to come, especially with spending cuts for the public sector announced in October.

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