Whilst our tax team concentrates on the proposed changes to the taxation system and our core markets in not for profit, real estate, media and marketing services, financial services sector and the like (see separate blog posts), others within the practice are perhaps more interested in the general impact of the broader economic measures. In my role as a Board member of the international association MSI I am particularly interested in how the Budget changes are likely to alter the attractiveness of the UK for international companies and investors.
Reducing the deficit
Heralded as being “tough but fair” the Emergency Budget is focused on reducing the country’s significant deficit and restoring confidence in the global arena. The reduction is financed 77% from lower spending and 23% from higher taxation – in line with the recommendations of authorities such as the OECD.
The projected reduction in the national debt is dramatic – falling from its current level of 10.1% of GDP to 1.1% in 2015 – effectively halving the country’s borrowing. The resulting reduction in the interest payments being significant - from the previously forecast of £637bn this year to £711bn in 2015/16. (Check stats?)
Growth
Based on projections from the new independent Office for Budget Responsibility using the Chancellor’s measures, the figures are now:
2010 1.2%
2011 2.3%
2012 2.8%
2013 2.9%
2014 2.7%
The Consumer Price Index will reach 2.7% by the end of the year before returning to its target. Inflation is set to get back to the projected 2%.
Unemployment
This will peak at 8.1% and then fall until it reaches 6.1% in 2015.
Spending cuts
The Chancellor was at pains to stress that the majority of capital spending projects will proceed. £44bn is being cut from departmental budgets – effectively a 20% reduction overall, although with protection on NHS and international aid commitments, some will reduce by as much as 25% over the next four years.
Public Sector Pay and Pensions
A two year pay freeze across the public sector – although 1.7m employees (28% of the public workforce) earning less than £21,000 will be protected by receiving a flat increase of £250 each year. Armed Forces will see their allowances increased to £4,800. Will Hutton will lead a study into fairer pay to ensure that the situation where some senior civil servants are earning 20 times more than the lowest paid stops. John Hutton will investigate the £10bn pa public sector pensions gap. Whilst common sense understands that the public sector should feel some of the pain that the private sector has experienced during the last two years of the recession, there will no doubt be strenuous opposition from teachers, nurses and other public servants who have long felt that they were already underpaid.
Welfare
He started by reminding everyone that our welfare bill had grown by 45% over the past decade (from £132bn to £192bn) and alerting us to Germany’s recent £30bn cuts programme. The tax credits system – currently costing £30bn – will be reduced for those earning over £40,000 (current £50,000 limit). Child benefit will be frozen for the next three years. Disability Living Allowance – which has seen the number of claimants triple – will remain the same but medical assessments will be introduced from 2013. Housing Benefit, which has grown from £14bn to £21bn, will be reduced by £1.8bn pa (7%). After highlighting the seriousness of the situation with the example that some families receive as much as £104,000 pa – which needs 16 working people to support that amount he introduced a number of limits for the maximum rentals available. Pensions will be linked to Consumer Price Index and not the Retail Price Index as in the past and annual increases will be at least 2.5%. There were also some protective measures for children living in poverty.
Tax changes
The Chancellor stressed on more than one occasions that the numerous tax changes (see separate blogs and Budget updates) meant that the UK was well and truly “Open for Business”. He appeared confident that the changes in Corporation Tax and other business taxes meant that the UK will once again be one of the most attractive economies in the developed Western world. A White Paper is promised to look at addressing the inequality of private sector jobs between the South and North although regional transport projects and growth funds appear to have remained unscathed.
Other key points
One or two of the other key points that caught my eye included:
- The Chancellor’s clarity that we will not be entering the Euro during this Parliament – and his abolition of the Euro Preparatory Unit
- A number of nationally owned assets will be sold to the private sector – including student loans and the Tote
- It will be interesting to see the impact of the new bank levy – announced in conjunction with France and Germany and supported by the IMF - on London’s leading position in the financial services sector
- The Autumn Spending Review is scheduled for 20th October – keep your diaries clear!
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