UK Deficit Tackled With Higher VAT

Today the Chancellor of the Exchequer George Osborne has set out his Budget with a comprehensive five-year plan aimed at rebuilding the British economy.

He said the Government will increase the standard rate of Value Added Tax (VAT) to 20% from 2011 and increase the standard rate of Insurance Premium Tax to 6% and the higher rate to 20% and introduce a two year pay freeze for public sector workforces from 2011-12, except for those earning £21,000 or less, who will receive an increase of at least £250 in these years.

He said the Government has therefore set a fiscal mandate to achieve cyclically-adjusted current balance by the end of the rolling, five-year forecast period. At this Budget, the end of the forecast period is 2015-16.

By 2014-15, 80% of the additional consolidation measures set out in this Budget will be delivered through spending restraint, with additional spending reductions of £31.9bn a year by 2014-15 and additional net tax increases of £8.2bn.

On spending, he said there will be £29.8bn of the additional savings taken from public sector current expenditure and £2.2bn from public sector gross investment. There are no further reductions in public sector gross investment beyond the cuts already announced as part of the £6.2bn of savings in 2010-11;

Mr Osborne said that measures to support enterprise include a major package of reforms to reduce corporation tax rates including a reduction in the main rate of corporation tax from 28% to 24% over the course of four financial years from April 2011 and reductions to the main and special rates of capital allowances from April 2012 and a reduction in the small profits rate from 21 to 20% from April 2011.

He also said there will be a National Insurance Contributions holiday for new businesses which start-up in certain areas of the UK over the next three years and an increase in the Enterprise Finance Guarantee and the creation of a new Enterprise Capital Fund.

He has also increased the personal allowance for under 65s by £1,000 to £7,475 in 2011-12, taking 880,000 people out of income tax altogether and said that capital gains tax will rise from 18 to 28% for those liable to income tax at the higher and additional rates.

The 10% rate for entrepreneurial business activities will be extended from the first £2 million to the first £5 million of qualifying gains made over a lifetime.

As part of the welfare reforms, the Budget announced uprating the basic State Pension by a triple guarantee of earnings, prices or 2.5%, whichever is highest, from April 2011 and a reduction in tax credit eligibility for families with household income above £40,000 (down from £50,000) from April 2011.

He also intends to restrict the generosity of pensions tax relief by reducing the annual allowance from April 2011.

(BMcC/GK)