On the 22nd of June 2010, George Osborne delivered the ‘emergency’ Budget, just three months after the previous budget. It was Chancellor Osborne’s and the coalitions first Budget.
We finally understand what George Osborne meant when he spoke of “the age of austerity”. The chancellor said the “unavoidable budget” required a VAT increase to 20% next year, higher capital gains tax, a levy on banks, a two-year public sector pay freeze and less generous benefits, but insisted the package was needed to thwart the financial markets from turning on Britain.
Presenting his first Budget to MPs, Mr Osborne said the measures were “tough but fair”. Labour unsurprisingly said it was “reckless” and would “throw people out of work”. Acting Labour leader Harriet Harman said Chancellor Osborne’s budget would stifle growth and hit hardest “those who can least afford it”.
George Osborne’s Budget was a major departure from previous economic policies with many hoping it would be a “defining moment” in Britain’s economic recovery. However trade unions were concerned that thousands of jobs would be lost, mainly in the public sector, potentially wrecking local economies and sparking a “double-dip” recession.
Apart from the VAT increase, tax credits are to be cut for families earning more than £40,000 a year and public sector wages are to be frozen for two years for those earning more than £21,000. The fears of some Tory backbenchers came true when the Capital gains increase to 28% was announced for top rate tax payers.
Mr Osborne also froze the Royal families allowance at £7.9m a year and added that in the future their expenses would be under scrutiny from the National Audit Office. In other moves, the Chancellor promised to link pensions to earnings – or prices or 2.5% if they are higher. From January 2011, the government will bring in a bank levy, which will apply to the balance sheets of UK banks and building societies and the UK operations of foreign banks. Mr Osborne said the move would raise £2bn a year once it was fully in place.
The IFS have claimed that the VAT increase was far from ‘unavoidable’. Robert Chote, director of the Institute of Fiscal Studies, said: “You might as well say it was his desire to cut other taxes that made it so.” Despite Mr Osborne’s attempts to present the Budget as “fair”, the IFS claimed his measures hit the poor harder than the rich because of £11bn of welfare cuts.
HOW WILL THE BUDGET AFFECT YOU?The Treasury themselves say individuals will only be worse off from NI changes and income tax when their income gets close to £50,000. However, things quickly change when you bring VAT and benefit changes into the equation. In 2012, when most tax credit changes kick in, all households will be worse off.TAXESOverall you will most likely end up paying more. Taxes are increasing, firstly on VAT starting in January 2011. Capital Gains Tax will stay the same except for those on the highest income for whom it will increase to 28%. As for income tax, the personal allowance is to be increased.STATE BENEFITS AND TAX CREDITSThe coalition government are looking to save loads of money on welfare and benefits. Therefore benefits, tax credits and public pension will be ‘uprated’ in line with the CPI rather than the often higher RPI. This will probably save the government around £6bn a year. Tax cresits will no longer be available for people earning more than £40,000 next year.PENSIONSFrom April 2011, the state pension will rise by the increase in average earnings, or move in line with prices or by 2.5%, if either of those two is higher. The government has also confirmed that it wishes to increase the state pension age to 66 in the not too distant future.PUBLIC SECTOR WORKERSA two year pay freeze has come into effect for workers in the public sector except for employees who earn less that £21,000 a year.
James Browne, IFS research economist, said: “If you look at reforms due to be introduced in 2013 and 2014, they hit the poorest hardest and indeed keep on hitting them more and more every year.” Mr Chote added that “looming cuts to public services… are likely to hit poorer households significantly harder than richer households”.
Prime Minister David Cameron said: “In this emergency Budget I believe you have the measure of this government. “Will it provoke debate? Certainly. Will it cost our coalition some popularity? Possibly. But is this the right thing to do – for the health of our economy, for the poorest in our society, for the future of our country? I passionately believe it is.”
This Budget will be remembered for a long time to come. Let’s hope its for the right reasons.
This was a guest post by ‘Young Economist.’ Check out his blog for more like this!