Emergency Budget 2010: Osborne gambles on 'unavoidable' cuts and taxes

A VAT hike to 20% and swingeing spending cuts - but better news on CGT and corporation tax....

Last Updated: 31 Aug 2010

The headlines after today's Emergency Budget will probably be about the hefty hike to VAT – which will go up to 20% from January – and some fierce Government spending cuts, with a two-year public sector pay freeze and a 25% average drop in most departmental budgets (including a massive £11bn cut to welfare). But there were some sweeteners for businesses: including a four-year plan to cut corporation tax to 24%, lower National Insurance payments for small companies and only modest cuts to investment allowances. Capital gains tax is indeed going up, but only to 28%, and only for higher rate taxpayers – and entrepreneurs will actually get to keep more of their gains than before. So there's a lot more for the private sector to welcome than the public sector...

This was a wide-ranging Budget, with lots of detail and it's already provoking some huge ideological disputes about the impact it will have on the recovery. Chancellor George Osborne argued forcefully that we need 'decisive action to deal with the country's record debt’ and ‘pay the bills of past irresponsibility', taking every opportunity to put the boot into his predecessors – and with a quarter of a trillion pounds due to go on debt service over the coming Parliament, according to the Treasury, he may have a point.

His 'tough but fair' Budget, which he said would wipe out the structural deficit within this Parliament, was split 77-23 between spending cuts and higher taxes. On the first point, he plans to knock more than £60bn off the annual spending bill by 2015, with most departments (apart from health and overseas aid) seeing their budgets cut by about a quarter. There'll also be a civil service pay freeze, although only for people earning more than £21k, while John Hutton is busy scoping out savings in the pensions bill. Many in the private sector will feel that since the public sector has so far been largely insulated from the recessionary pain (and currently gets better pay and pensions), this is only fair.

The higher rate of VAT will no doubt worry retailers (though exempt items will remain so), but it won't come as a major surprise. And there was good news on corporation tax – the headline rate is going down by 1% a year for the next four years, and the small companies rate dropping to 20% (instead of rising to 22%). The news on investment allowances wasn't bad either: the Chancellor's cuts were relatively modest and won't apply to the smallest firms at all. The Enterprise Finance Guarantee scheme has been extended. And Osborne promised to provide UK plc with greater certainty and stability on tax and regulation; after the constant meddling of the late Labour years, that will certainly go down well. There'll be a bank levy – co-ordinated with France and Germany – which will allegedly bring in £2bn a year, but that's unlikely to ruffle too many feathers outside the City.

And then there was CGT. Business groups, politicians and taxpayers alike have been up in arms about plans to hike CGT closer to the level of income tax. But in practice the Chancellor took a relatively conservative (with a small C) approach: CGT will immediately go up to 28% for higher earners, but it will stay at 18% for low and middle-income earners, and entrepreneurs will not only keep their 10% rate but also see their threshold rise from £2m to £5m – so they get to keep more of their hard-earned gains. And quite right too.

The markets have reacted fairly positively to today's Budget – the FTSE is up, and the pound is down a bit against the dollar (reflecting confidence that the Bank can keep interest rates low). But it will be a while before we can really judge its success. The Office of Budget Responsibility has actually downgraded the UK's growth forecast on the basis of Osborne's Budget, and the Opposition insists that these measures will hinder, not help, the recovery. Only time will tell – but for business, the reaction is likely to be largely positive today. The Chancellor will certainly hope so, because he won't get any sort of recovery unless UK plc is on board.

In today's bulletin:

Emergency Budget 2010: Osborne gambles on 'unavoidable' cuts and taxes
Editor's blog: The four-litre enema syringe
PE firms tear up their betting slips as Gala Coral deal falls over
Can BA plug £3.7bn pensions hole?
Good job candidates are par for the course

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