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News : EU Economy Last Updated: Jun 23, 2010 - 9:12:29 AM

UK Budget: VAT to rise to 20%; Ex-health, budgets of government departments to be cut 25% in real terms in 4 years
By Finfacts Team
Jun 22, 2010 - 1:48:33 PM

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UK Budget: VAT is to rise from 17.5% to 20% in January as Chancellor George Osborne unveiled the biggest package of tax increases and spending cuts in a generation. Ex-health, budgets of government departments are to be cut 25% in real terms in 4 years.

He said his "tough but fair" Budget was "unavoidable" although he told MPs in the Commons there would be no extra tax on alcohol, tobacco and fuel.  Child benefit will be frozen for three years and there would be cuts to family tax credits and housing benefits. And there will be a two year pay freeze for public servants paid over £21,000.

Osborne said the UK's record budget deficit of £156bn would be eliminated within five years and his action was needed to prevent a "catastrophic collapse" in economic confidence. He said it would be done in a "fair" way with the better-off shouldering most of the burden.  "Everyone will pay something but the people at the bottom of the income scale will pay proportionately less than those at the top. This is a progressive Budget," he said.

From January 2011, the Government will introduce a bank levy, which will apply to the balance sheets of UK banks and building societies and the UK operations of foreign banks. Osborne said the move would raise £2bn a year once it was fully in place. Public sector workers earning more than £21,000 a year would have a two year pay freeze with those paid less will get a flat pay increase of £250 for the next two years.

Housing benefit will be reformed with a maximum limit of £400 a week, in a package saving £1.8bn a year by the end of the Parliament. He also announced cuts to the health in pregnancy grant while the Sure Start maternity grant will be restricted to the first child only and lone parents will be expected to look for work when their youngest child goes to school.  However, there will be an extra £150 a year for the poorest families, through changes to family tax credits to ensure child poverty reduction targets would be met.

The government is also to introduce a medical assessment for Disability Living Allowance from 2013 for new and existing claimants.

The budgets of government departments - - excluding health and international development would be cut by 25% over four years, with the full details to be set out on October 20th.

The Chancellor also froze the Civil List payments to the Royal Family at £7.9m a year and said in future years they would be subject to scrutiny by the National Audit Office.

He promised an "enterprise-led recovery" which rewarded work and protected the most vulnerable.

But he said the UK economy was forecast to expand at a slower rate than predicted by Alistair Darling in his final Labour Budget in March, according to figures from the new Office for Budget Responsibility (OBR).

The forecast for 2011 is now for 2.6% growth, not 3.25%.

Treasury budget documents


From January 4 2011, the main rate of VAT will rise from 17.5% to 20%. Current zero-rated items like children's clothes and magazines will remain exempt.

Personal income tax allowance to be increased by £1,000 in April to £7,475 - worth £170 a year to basic rate taxpayers.

Councils which propose low council tax increases will be offered extra funds to allow them to freeze the tax for one year from April 2011.

Capital Gains Tax remains at 18% for low and middle-income savers but from midnight, higher rate taxpayers will pay 28%.

A "landline tax" to fund the rollout of fast broadband will be scrapped but the government will support private investment, partly funded by the digital switchover under-spend within the TV licence fee.


From April 2011, the threshold at which employers start to pay National Insurance will rise by £21 per week, above indexation.

Corporation Tax will be cut next year to 27%, and by 1% annually for the next three years, until it reaches 24%. The small companies' tax rate will be cut to 20%.

Tax relief for the video games industry will be scrapped.


A bank levy will be introduced, which will apply to the balance sheets of UK banks and building societies and the UK operations of foreign banks. But smaller banks will not have to pay. It is expected to raise over £2bn a year.


No change this time round. Labour's plan to increase the duty on cider by 10% above inflation will be scrapped from July.


Public sector workers face a two-year pay freeze, although 1.7 million of those earning less than £21,000 will get a flat pay-rise worth £250 in both years.


The government will accelerate the increase in state pension age to 66.


Child benefit will be frozen for the next three years.

Tax credits will be reduced for families earning over £40,000 next year.

Health in pregnancy grant to be abolished from April 2011, the Sure Start maternity grant will be restricted to the first child

Lone parents will be expected to look for work when their youngest child goes to school.

From 2011 - except for the state pension and pension credit - benefits, tax credits and public service pensions will rise in line with the Consumer Price Index, rather than the, generally higher, Retail Price Index, saving over £6 billion a year by the end of the Parliament.

New maximum limit of £400 a week will be applied to Housing Benefit, to save £1.8bn a year by the end of the Parliament.

The government will introduce a medical assessment for Disability Living Allowance from 2013 for new and existing claimants.

The welfare shake-up will save £11bn by 2014/15.


The economy is forecast to grow by 1.2 % this year, 2.3% next year, 2.8% in 2012, 2.9% in 2013 and 2.7% in both 2014 and in 2015.

The UK is set to miss the previous government's "golden rule" - of borrowing only to invest over the economic cycle - in the current cycle by £485bn.

Consumer price inflation is expected to reach 2.7% by the end of 2010 before "returning to target in the medium term". The inflation target remains at 2%, as measured by the Consumer Prices Index.

Unemployment is forecast to peak this year at 8.1% and then fall for each of the next four years, to reach 6.1% in 2015.


The structural current deficit "should be in balance" by 2015-16.

The balance of spending cuts vs tax rises would be 77% to 23%.

The measures are forecast to result in public sector net borrowing of £149bn this year, £116bn next year, £89bn in 2012-13 and £60bn in 2013-14. Mr Osborne said by 2014-15 borrowing would reach £37bn, falling to £20bn in 2015-16.


 Osborne said the state now accounted for "almost half" of all national income which was "completely unsustainable".

He said current expenditure would rise from £637bn in 2010-11 to £711bn in 2015-16, blaming a "rapidly rising bill for debt interest".

He said his Budget implied further £17bn cuts in departmental spending by 2014/15, unprotected departments face an average real cut of around 25% over four years.

He said compared with the plans set out by Labour, the government would cut additional current expenditure by £30bn a year by 2014-15.

There would be no further reductions in capital spending totals in this Budget but "careful choices" would be made about how it was spent. Projects with "a significant economic return to the country" would be prioritised - assessed in the autumn spending review.


The government will "explore changes to the aviation tax system" such as switching from a per-passenger to a per-plane levy. It will consult on major changes.


A White Paper to be published on tackling regional economic differences in the UK later in the summer, followed by a paper on rebalancing the economy of Northern Ireland. NI leaders will be unhappy that the corporation tax has not been reduced to the Republic's level of 2.5%.

The upgrade of the Tyne and Wear Metro, extension of the Manchester Metrolink, redevelopment of Birmingham New Street station and improvements to the rail lines to Sheffield and between Liverpool and Leeds will go ahead.

A Regional Growth Fund will be created to help fund regional capital projects over two years.

People setting up new businesses outside London, the South East and the east of England will be exempt from £5,000 of National Insurance payments for the first 10 workers.

UK Finance Minister George Osborne unveiled his emergency budget Tuesday, which cut growth and borrowing forecasts, raised VAT and slapped a tax on banks. Geoff Tresman, chairman of Punter Southall Financial Management, Madsen Pirie, president of the Adam Smith Institute, and Jeremy Cape from Denton Wilde Sapte discuss:


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