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Budget 22 June 2010 - General Background 

Driven by the perceived need to reduce the budget deficit, new Chancellor George Osborne’s measures are intended to reduce it by cutting public spending, contributing 77% and taxation increases providing the balance. The spending reductions, including state benefits, amount to about 25% of the non-protected government departmental budgets. An exception is the basic State Pension; increases are to be realigned with those of average earnings. There is quite a lot still to be decided in the measures, with some depending upon the inflation rate in September. The theory behind the strategy and taxation measures is, whilst raising overall revenue, to make the UK an attractive place in which to do business.

In what he described as an unavoidable budget the Chancellor said: 

UK economic growth rates are forecast at 1.2% for this year, 2.8% next, followed by 2.9% and 2.7% for both 2014 and 2015. The consumer price index is now intended to be fully used for all budgetary and tax purposes, instead of the RPI. The monetary inflation target remains at 2%, but is expected to be 2.7% by the end of 2010, reducing to 2.0% over the medium term. UK unemployment is expected to peak at 8.1% this year, falling to 6.1% in 2015.

Comment

Whilst the tax increases and truly severe spending cuts are most unwelcome, the measures are generally pro-business. Because it is a disincentive to employment, it is a shame that the increase in National Insurance "payroll tax" was not cancelled. One wonders about the advisability of a bank levy (risk operations could be de-merged and relocated to a country, where there is to be no such levy). Making the Income Tax personal allowance subject to yet more restriction makes Income Tax more complicated.

Main (March 2010) General Budget Background 

In the last Budget before a general election, Chancellor Darling advised that the overall effect of the recession so far was a 6% reduction of the UK economy. He revised his forecast growth for this year to be between 1% and 1.5%. For 2011, growth was forecast at 3% to 3.5%. Current monetary inflation was noted at 3%, but is expected to decline to 2% by the beginning of2011. To protect the economic recovery, the Chancellor insisted that real public spending cuts will not be made before 2011. As a result government borrowing this year will be £ 167bn.  Most of the tax rates and thresholds were already known, but holding the Capital Gains Tax rate and doubling the amounts of Annual Investment Allowance and that available for CGT to retiring entrepreneurs were surprises.

Comment

There is probably very little time for the Budget to become a Finance Act before a general election. The possibility must be that a shortened version may be enacted and no matter which political party wins the election, it may have to be re-visited.

Those with 2010/11 gross incomes marginally around the thresholds of £ 100,000, or £ 150,000 seem bound to end up with a tax end of year liability or over-payment. This is because, except for the most straightforward of cases, it must be a practical impossibility for their PAYE codes to be correct. 

The increased Annual Investment Allowance may prove to be a real boost to the economy; the proposed National Insurance increase in 2011 is not.

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