TAX NEWS - June 2010

British coalition's first budget raises tax, cuts public spending

LONDON, June 23, 2010 -- A tax rise and huge cuts in public spending were the two main features of the British coalition government's first budget, which Chancellor of the Exchequer George Osborne presented to the House of Commons Tuesday.

The new coalition government, the first in Britain for 70 years, came to power after the inconclusive May 6 general election, which saw the ruling Labor party defeated. It has said its principal task is to tackle the record public spending deficit, currently 149 billion pounds (220 billion U.S. dollars) for 2010-11.

Osborne, who comes from the Conservative Party, which is the larger partner in the coalition government, said value added tax (VAT), a sales tax, will rise from 17.5 percent to 20 percent from Jan. 1 next year.

This would raise 13 billion pounds (19.3 billion U.S. dollars) a year, he said.

Income tax allowances would rise to 7,645 pounds (11,390 U.S. dollars) tax free, helping all taxpayers but especially the poorer ones, while the thresholds for higher rate tax would be frozen for three years, hitting higher-middle income earners. The move was part of a coalition promise to raise the threshold to 10,000 pounds (14,900 U.S. dollars) within the term of the government.

Osborne said "a responsible society is one which rewards the efforts of those who choose to work" and it is "important to lift people out of the tax system."

The other headline initiative likely to cause controversy was a cut in government spending of about 25 percent across all departments, except for foreign aid, health and schools.

Osborne highlighted how his budget would hit public debt totals.

"Public sector net borrowing will be 149 billion pounds (222 billion U.S. dollars) this year, falling to 116 billion pounds (173 billion dollars) next year, 89 billion pounds (132.7 billion dollars) in 2012-13, and 60 billion pounds (89.5 billion dollars) in 2013-14. By 2014-15, borrowing is expected to be 37 billion pounds (55 billion dollars), exactly half the amount forecast in the (Labour) March Budget. In 2015-16, borrowing falls further to 20 billion pounds (29.8 billion dollars)," he said.

"As a share of the economy, borrowing will fall from 10.1 percent of GDP this year to just 1.1 percent in 2015-16."

The details of the cuts will be announced in autumn in a major review of government spending.

The growth forecast for GDP for this year was scaled back to reflect the impact of the cuts, with the forecast growth at just 1.2 percent this year, 2.3 percent next year and 2.8 percent in 2012.

This contrasts with the optimistic predictions from the outgoing Labour government in its final budget in March, when it forecast there would be growth of 3.5 percent next year.

Osborne sought to target the soaring welfare budget, which he said was now 192 billion pounds (287 billion dollars), with cuts. He announced that cutbacks in housing benefits would be frozen and tests for access would be toughened.

"Measures to control the costs of welfare will save the country 11 billion pounds (16.4 billion dollars) by 2014-15," Osborne said.

In further major assaults on government spending, Osborne said pay for public sector employees would be frozen for two years for those on more than 21,000 pounds (31,000 dollars)a year.

Child benefits, paid to parents to help fund clothes and food for each child, would be frozen for three years and would be cut for families with an income of more than 40,000 pounds (59,600 dollars).

Moves would be accelerated to raise the pensionable age to 66 and pensions would be guaranteed to rise in line with earnings and prices, Osborne said.

Osborne had some good news for businesses. He said corporation tax would be cut to 27 percent next year, and then by 1 percent for each of the next three years, and the tax rate for small companies would be reduced to 20 percent.

He took on the controversial subject of banks by imposing a levy to start next year on banks and building societies and any banking operations in Britain. It was expected to raise 2 billion pounds (2.98 billion dollars) a year.

Osborne explained why he wanted a banking levy. "This was a crisis that started in the banking sector and the failures of the banks imposed a huge cost on the rest of society. So it is fair and right that in future banks should make a more appropriate contribution which reflects the many risks that they generate."

The bank levy complements similar moves by France and Germany.

Osborne said he would also tackle a loophole in capital gains tax (CGT) paid on profits from the sale of some types of assets, which wealthy people had exploited.

"Some of the richest people have been able to pay less tax than the people who clean for them, costing other taxpayers over 1 billion pounds (1.49 billion dollars) per year," said Osborne.

Osborne said he would promote enterprise, by extending the 10 percent CGT threshold for entrepreneurs from the first 2 million pounds (2.98 billion dollars) they made over a lifetime to 5 million pounds (7.5 billion dollars) over a lifetime.

Reaction was swift, with business keen to praise. Richard Lambert, director of the Confederation of British Industry (CBI), said: "The chancellor has achieved his twin objectives of setting out a credible plan for the public finances and producing a convincing growth strategy for the longer term."

"The five-year route map for corporation tax provides much-needed consistency and certainty," he said.

Lambert also praised the chancellor for taking measures to soften the blow on the poorest in society, saying he had "sensibly taken measures to secure public support by offering extra help to cushion the impact on low-income families."

Labour attacked the budget. Acting leader Harriet Harman said it would hit hardest "those who can least afford it" and it would stifle growth.

Shadow education secretary Ed Balls said: "The result will be slower growth and higher unemployment. It is hugely unfair."

Brendan Barber, general secretary of the Trades Union Congress (TUC), which represents most of the unions, was highly critical. He said: "The economy is still fragile, and today's measures will certainly slow recovery and could well stop it in its tracks."

A leading business economist welcomed the budget's strategy.

David Kern, chief economist at the British Chambers of Commerce, said: "The budget could be a defining moment in Britain's economic history. If successful, the chancellor's plan could put the United Kingdom on the path toward a sustainable recovery."

"The huge scale of the spending cuts, and the decision to implement them at an accelerated pace, could increase the risk of a double-dip recession. But, given the threats to our credit rating, the government is right to proceed at this stage with a bold and aggressive deficit-cutting program."

Osborne defended his budget against the expected wave of protests against what is the toughest budget since World War II.

He said he did "not hide that they are tough for people" but it was "unavoidable given the debts we face" and that "my priority is that the measures are fair - the richest pay more than the poorest not just in cash but as a proportion of income as well."