Coalition Budget: “The Emergency Budget” – initial reaction

As you may have just seen, the new Coalition government has just announced its “emergency” Budget, including a large array of spending cuts and some not insignificant tax rises, with the goal of reducing the UK’s budget deficit. Below is my initial reaction to the main anouncements, although as usual the devil is in the detail so there may be further conclusions to draw once the full text has been digested. I’ll provide an update and will let you know if that is the case.

 

By way of introduction, at various stages George Osborne called this ‘The Emergency Budget’, ‘The Unavoidable Budget’, ‘The Progressive Budget’ and ‘The Balanced Budget.’ And in terms of his announcements, he has introduced some interesting and far-reaching measures. From a personal viewpoint, I had feared the worst (some of the rhetoric leading up to today was alarmist to say the least and paved the way for some heavy-handed new rules that could have had some damaging consequences). However, leaving aside any political biases, I was pretty impressed by the measures announced today. There seems to be a good balance between sharing the burden but doing so fairly and in a way that will support economic growth. The reduction in the budget deficit appears to be on credible ground.

 

77% of the proposed reductions in the deficit will come from spending cuts, with 23% from tax rises. In focusing on issues relating to personal finance, I won’t go into the spending cuts in much detail here. I will, however focus on the key tax rises and their potential implications. I would like to draw your attention to the CGT and pension changes in particular.

 

• VAT: to increase to 20% from 4th January 2011: this will undoubtedly make the main headlines, but was largely expected;
• Capital gains tax: will remain at 18% for basic rate taxpayers, but will rise to 28% for higher rate taxpayers from midnight tonight. The annual exemption of £10,100 per person will remain, and the 10% rate of Entrepreneurs’ Relief will now apply for the first £5m. These changes are slightly watered down versions what had initially been mooted (a rise to 40% with a possible cut in the annual exemption to just £2000) but must be commended. The risk had been for a clumsy change to CGT, which could have created several unintended consequences (even a possible reduction in total tax revenues) but in reality the changes have been much more considered and shouldn’t be overly alarming. However, it increases the emphasis that people should place on CGT planning as part of their financial plans. Don’t hesitate to get in touch if you would like to discuss the CGT implications in more detail;
• Pensions: the minimum age for State Pensions will rise to 66 sooner than initally thought, although the Basic State Pension will now rise in line with the highest of earnings, inflation or 2.5%. While the intentions of the recent removal of tax relief on pension contributions for higher rate taxpayers will be maintained, the proposed restriction may be revamped with a new system of a reduced annual allowance of £30,000 to £45,000 (currently £255,000). A consultation period will ensue before a final decision is made;
• Corporation tax: will be reduced by 1% every year for the next four years, reducing the main rate of corporation tax to 24%. This, along with some other measures aimed at small businesses, are measures to be applauded, as they will undoubtedly attract business to the UK and hence should drive growth, jobs and, by extrapolation, tax receipts.

 

As usual, banks were the fall guys, with a commitment to introduce a banking levy and to focus on ‘unacceptable’ banking bonuses. How these are implemented will remain to be seen, although it was interesting to note that France and Germany have joined the UK in making similar commitments.

 

Finally, an overhaul of the benefits system has been proposed and must also be commended (assuming it is implemented as intended). There will be new means tests for high earners, and Child Benefits will be frozen, affecting everyone in the UK.

 

In conclusion, this was a fair budget with some interesting measures that should not, at face value, create unwanted constraints on economic growth. In fact, the cuts in public spending should be balanced by growth in the private sector if, as hoped, support for UK enterprise really does attract business to the UK.