As the dust settles and we move into the brave new post Emergency Budget world, commentators used to budgetary cause and effect are still trying to read between the lines and work out what pain we will have to endure during the lifetime of this Government, assuming, of course, Parliament approves the budget.
Having been warned by every media channel available that the Emergency Budget would mark the beginning of an extended age of austerity, some may be excused in thinking that the announcements were not too painful. After all, numerous Governments have wanted to cut benefits and increase selected taxes for years but have shied away from these acts of political suicide. The current Chancellor, using the expression ‘simply unavoidable’ and referring to his ‘predecessor’, can take actions his predecessors could only dream of. The budget aims to cut £11 billion a year from welfare payments.
All areas are now up for review. The state pension age for men will rise from 64 to 66 from 2016 and to 68 by 2046 and women will move to a state pension age of 66 a few years after men. This reflects society’s longevity, will save the Government billions and should keep more experienced people in work and paying taxes for longer.
It will also be interesting to see if banks, after they have recovered from the levy on their balance sheets from 2011, will use individuals’ longer working lives to introduce longer term mortgages, which could help today’s first-time buyers.
Still on the pension front, John Hutton will now be looking at the Pensions Bill and higher employee contributions. Already the Government is considering ways of raising the £3.5 billion it expects to collect from restricting pension tax relief for higher earners. Finally, the rules which compel individuals to use their pension savings to buy an annuity by the time they reach 75 will be removed from April 2011.
The Chancellor delayed the introduction of 20% VAT until January, which will see us all buying the things we planned to – but by Christmas. This will give the economy a short-term boost but things will no doubt slow in the New Year. Thankfully there was no announcement of a change to new home’s exemption from VAT. However, stamp duty for first-time buyers is up for review.
One action brought to bear immediately was the rise in Capital Gains Tax (CGT). This had been on the cards since the coalition government came to power, but was a relief to many that it has not been introduced at the 40 or 50% level. Failure to bring it in immediately would undoubtedly have ’skewed’ the market, already over-stocked with property put up for sale by investors wanting to beat the CGT increase. The market now knows where it stands and hopes it will not curtail the investment decisions of those wanting to invest in the property market.
We can all bite the bullet and buy the things we wanted before VAT goes up next year and tighten our belts a little – surely. The trouble is that it has long been recognised that to get out of the current nation debt it will take more than tax increases – there will have to be considerable cuts in Government spending.
The crux of the budget was that 77% of total debt consolidation is to be achieved through spending reductions and 23% through tax increases. The Government plans to cut spending by £32 billion yearly and bring in £8 billion a year in net tax increases.
That means that the Chancellor’s Emergency Budget simply lit the slow fuse to longer-term discomfort, which will start with most Government departments having to cut their budgets by 30% in the autumn. By the end of this parliamentary term the Government intends that most Government departments will face cuts of more that 25% following a spending review on 20 October.
This will obviously impact the already hard hit Homes and Community Agency and its ability to support both the private and social housing sectors – but to what extent is still to be discovered.
Unfortunately these Government department cuts will not only impact the public sector. Private companies with Government contracts are also feeling particularly nervous. The Chancellor has already been warned that a reduction of £23 billion from major infrastructure projects could impact 500,000 construction jobs.
Also, the Efficiency and Reform Group, based in the Cabinet Office, will be pushing departments to renegotiate contracts and scrap ‘unnecessary’ spending.
The Emergency Budget set the road map to recovery but the bumps in that road will be experienced as the effects of the changes announced begin to bite. And the first real bites will take place this October – so it won’t just be Halloween that provides all the scares this year.
The Emergency Budget marked the end for The Golden Rule, which required the Government to balance its budget over the economic cycle. The country will miss The Golden Rule target in this economic cycle by £485 billion.
