Emergency Budget tough but fair

Yesterday's emergency Budget is a decisive budget that deals with the record deficit the new Government inherited from Labour.

It takes the tough decisions to get the deficit under control at the outset of this new Government's term.

Labour left behind one of the largest budget deficits in Europe. Thanks to their incompetence, we are now borrowing one pound for every four we spend – increasing our national debt by £3 billion a week.

The crisis in the eurozone shows that the consequences of not acting are severe – higher interest rates, sharper rises in unemployment and potentially even the end of the recovery.

So the Chancellor has now taken the unavoidable tough decisions that the Governor of the Bank of England and the G20 called for and that Labour ducked. We will do this in a way that strengthens and unites the country. Everyone has to contribute – we are all in this together. In cleaning up Labour’s mess we will protect the most vulnerable, including low income families and pensioners.

As well as paying for the bills of the past, this budget starts planning for the future. Measures are being introduced to encourage the private sector to lead the recovery with growth and jobs across industries and regions. Independent forecasts predict that unemployment will come down every year in this Parliament.

I have set out below a summary of the main features of the Budget.

Responsibility

The most urgent task facing the country is tackling the deficit. Getting our public finances under control is a prerequisite for sustained economic growth. High levels of debt also put an unfair burden on future generations. This emergency budget sets outs a decisive plan to deal with Britain’s record deficit.

* The emergency budget sets out path of public spending for the next five years. Compared to the previous Government’s plans there is £40 billion of additional tightening by 2014-15. £17 billion of this comes from reductions in departmental spending; £11 billion from reductions in welfare spending; £3 billion from lower debt interest payments and £8 billion from net tax increases.

* The majority of deficit reduction is done through spending restraint rather than tax rises. This country is not under-taxed - it has over-spent. By 2015-16 77% of the total consolidation comes from spending restraint rather than tax rises.

* Labour’s spending plans implied a reduction in departmental budgets of 20 per cent. Given the Government’s commitments to real increases in NHS spending and protecting international aid, this budget implies that other departments will face an average real cut of 25 per cent. However final departmental settlements, alongside the split between departmental spending and welfare spending, will be set out in the spending review in the autumn.

* To help provide the infrastructure our economy needs there are no further cuts in capital spending totals beyond those announced as part of the £6.2 billion of savings in 2010-11.

* However, some tax rises are unavoidable. The sovereign debt crisis means that we need to reduce the deficit even more quickly in order to protect our economy. The Office of Budget Responsibility (OBR) has revealed the size of structural deficit Labour have left behind to be even larger than we feared, £12 billion larger next year.

* The Government will increase VAT to 20% on January 4th 2011, but makes no changes to items that are zero-rated. The wealthiest fifth of families will pay on average over £500 a year in additional VAT, while the fifth of families on the lowest incomes will pay around a third of that. VAT will still be below the average rate in Europe. The standard and higher rate of Insurance Premium Tax will also be increased to 6 per cent and 20 per cent respectively.

Fairness

Fairness underpins this Government’s budget. The Government will ensure that every part of society makes a contribution to deficit reduction while protecting the most vulnerable, including children and pensioners.

For the first time we are publishing tables showing the distributional impacts of the Budget measures. They show that the burden of deficit reduction is shared across all income deciles. Overall the richest will contribute most to deficit reduction and the impact on child poverty by 2012-13 will be statistically insignificant.

The emergency budget sets out measures to refocus the tax and benefit framework. It also includes action to reward those who work hard and save responsibly.

* Support for low and middle-income earners with an increase in the personal allowance of £1,000. This will take 880,000 of the lowest income tax payers out of the tax and benefit 23 million taxpayers by up to £170 per year.

* Reforms to the working age benefit and tax credit system so it is fairer and more affordable:

1. From April 2011 using the Consumer Price Index for the indexation of benefits, tax credits and public sector pensions;

2. Reforms to Housing and Disability benefits;

3. Reforms to tax credits to ensure support is targeted at those most in need, including limiting eligibility to households with incomes below £40,000;

4. Freeze to Child Benefit for 2 years.

* Support for pensioners – the Government will uprate the state pension so it rises by the highest of earnings, prices or 2.5 per cent from April 2011. This triple lock will benefit 11 million pensioners.

* An increase in the child element of the Child Tax Credit by £150 in 2010-11 and £60 in 2012-13 above indexation.

Together with the triple-lock on pensions these measures represent £3 billion of expenditure to protect the most vulnerable.

* An increase in capital gains tax rate from 18 per cent to 28 per cent for higher rate and additional rate. Basic rate taxpayers will continue to pay an 18 per cent rate on their gain. The 10 per cent rate for entrepreneurial activities will be extended from the first £2 million to the first £5 million of qualifying lifetime gains.

This strikes the right balance between fairness, simplicity and international competitiveness. The majority of the almost £1 billion in extra receipts will come from additional income tax.

* A two-year public sector pay freeze for those earning more than £21,000. This will generate savings of £3.3 billion by 2014 - 15. The 1.7 million public servants earning less than £21,000 will be protected with a cash increase of £250. The operational allowance for those serving in the military has also been doubled.

* The Government will work in partnership with local authorities in England to implement a council tax freeze in 2011 – 12.

Enterprise – growth

For too long we have been dependent on unsustainable public sector spending and financial services to support growth in our economy.

This emergency budget paves the way for a major rebalancing of the British economy, with growth being driven by the private sector across industries and all the regions.

It sets out plans to support business and restore the UK’s competitiveness by reducing regulation and tax rates. Government support will be refocused towards infrastructure, the low-carbon economy and regional development.

* A reduction in the main rate of corporation tax from 28 per cent to 24 per cent over the course of four financial years from April 2011. The UK will have the lowest corporate tax rate in the G7 and the 5th lowest in the G20 in 2014.

* A reduction in the small profits rate of corporation tax to 20 per cent in April 2011 – instead of increasing it to 22 per cent as Labour planned.

* A small reduction in capital and investment allowances to help pay for the headline rate reductions. However the manufacturing sector as a whole will pay less corporation tax as a result of the Government’s reforms.

* A levy on banks’ balance sheets from 1 January 2011. This will raise more than £2 billion, paying for the risks the banks potentially pose to the economy and resulting in a rebalancing of the burden of taxation between banking and other sectors.

* Action to stop Labour’s job tax by increasing the threshold for employer’s National Insurance Contributions by £21 per week. As a result the number of employees for whom employers pay no NICs will rise by 650,000.

* A £200 million increase the Enterprise Finance Guarantee Scheme to ensure small businesses have the finance they need to grow and support the economy. This will support additional lending of up to £700 million. The Government will also create a new Enterprise Capital Fund to support SMEs.

* A Regional Growth Fund, and a scheme to ensure that new businesses in the UK set up in regions outside of London, the South-East and the East do not have to pay employer NICs on the first ten employees hired in their first year of business.