Tuesday, June 22, 2010
The emergency budget 2010: growing through the big squeeze
Posted by David Smith at 03:00 PM
Category: Thoughts and responses

The big announcements in George Osborne's emergency budget were a hike in VAT from 17.5% to 20% on January 4 next year, welfare cuts building up to 11 billion a year by 2014-15, and a public spending "envelope" that implies real departmental spending cuts for non-protected areas of 25% over the next four years.

Nobody will have been much surprised by the VAT hike, despite one or two last minute suggestions that it might have been limited to one percentage point, or shelved altogether. A big chunky tax hike was needed and the VAT rise, which will raise an extra 13 billion a year by 2014-15, provided it.

Retailers have not welcomed the VAT rise but for business overall this was a pretty good budget. Corporation tax will fall every year for the next four years, taking the main rate down from 28% to 24%. The small company rate will drop from 22% to 20% next year. The rise in capital gains tax on non-business assets, which many were concerned about, will be limited to 28% for higher rate taxpayers - said by the chancellor to be the maximum that could be levied without damaging revenues on the basis of Treasury simulations. Businesses will have also welcomed the fact that, aside from this year's 2 billion cut, there will be no further reductions in capital spending.

The fiscal tightening implied by this budget, 40.2 billion by 2014-15, is huge, and on top of that planned by Labour. Eventually, it splits 77%-23% between spending cuts and tax hikes, though in the early years more of the burden is on tax hikes. In 2011-12, for example, the split is 57% spending, 43% tax. Nonetheless, it builds up to meeting the govenment's new fiscal rule - eliminating the structural current budget deficit and having a declining path for public sector debt as a percentage of GDP by the end of the parliament. Public sector net borrowing is predicted to fall from 149 billion this year to 20 billion by 2015-16, by which time government spending will be below 40% of GDP (39.8%).

Those are the forecasts from the new Office for Budget Responsibility (OBR), and they are tied to what is an optimistic set of economic predictions, despite the tightening. Short-term growth is marginally lower, at 1.2% this year and 2.3% next, but picks up to 2.8% in 2012, 2.9% in 2013 and 2.7% in 2014 and 2015. The OBR insists the new forecasts are not directly comparable with those produced ahead of the budget. Employment is predicted to rise and unemployment fall, despite these predictions. There is no hint of anything remotely approaching a double-dip. If it all goes wrong, maybe the OBR will get the blame. Much more here.