Wednesday 23 March 2011

Osborne will not be judged on this Budget

CHANCELLOR George Osborne pulled off a major surprise in today's Budget speech by reducing fuel duty by 1p.

Mr Osborne vowed to "put fuel in the tank of the British economy" with his Budget which reversed Labour's planned 1p rise and has deferred future increases.

The planned rise has been shelved until April 2012 with the increase expected at that point delayed until the summer of 2012.

Mileage allowance relief was increased from 40p to 45p per mile but the Chancellor did 43 other reliefs would be abolished.

Mr Osborne also confirmed that the VAT rise to 20% on fuel would remain, while rather oddly suggesting it would be "illegal" to reverse that decision.

A decision deferred is any move to introduce an air passenger duty but, as usual, alcohol and tobacco levies will rise 2% above inflation on Sunday - about 10p on a pint and 50p on a packet.

In better news, Mr Osborne announced an increase in the annual personal tax allowance by £630 to £8105 from April 2012 on top of the £1000 rise planned for next month.

But he has kept Labour's 1% increase in employee National Insurance Contributions, and he has indexed any further tax allowance increase from 2012 to the Consumer Price Index (CPI).

This is an effective tax increase as, unlike the Retail Price Index (RPI), CPI does not include mortgage payments and so future allowances will not increase by as much as previously.

Additionally, a proportion of taxpayers will not enjoy the fruits of this coming tax year's allowance increase as they move into the unadjusted higher rate bracket.

However, in better news for high earners, the Chancellor did announce a review of the 50% tax band which he, and previous Labour Chancellor Alastair Darling, considered a temporary measure.

And those who may need to pay inheritance tax will have noted with interest that a 10% discount will be given to those who give part of the profits from their estate to charity.

Meanwhile, the Chancellor's other surprise announcement related to a 2p cut in Corporation Tax from next month, double the amount previous forecast for this coming tax year.

He also confirmed that further 1p reductions in Corporation Tax would take place over the next three years, eventually reducing the rate to 23% by 2014.

Realising that a cut in Corporation Tax would leave him open to attack from Labour regarding tax on bankers' profits, Mr Osborne then announced the bank levy rate would be adjusted to offset this effect.

It was another shrewd political move by the Chancellor and it allowed him some wriggle room regarding investment in a Budget in which no real gifts were expected.

Using the money raised from the bank levy, Mr Osborne has pledged £250m to a shared equity scheme to help first time buyers purchase newly-built homes.

And he extended the small business rate relief holiday for a further year to October 2012 in a move worth £370m.

Meanwhile, £100m of Treasury money will be given to local authorities to deal with pot-hole problems and another £100m invested in various science projects.

In another pledge, Mr Osborne said that a further £2bn towards a "green investment" bank will allow it to start operating in early 2012, a year earlier than planned.

But it seemed other investments, such as the nationwide introduction of 21 so-called enterprise zones and the 24 University Technical Colleges, are at an embryonic stage with little detail known about them.

Undoubtedly, the Chancellor will hope that such schemes will encourage growth in the economy and reduce the unemployment rate.

It was a somewhat embarrassing moment for Mr Osborne when, in this much-vaunted "Budget for growth", he revised the figures for growth in 2011-12 and 2012-13 downwards.

And, furthermore, the Office for Budget Responsibility says it expects inflation to remain between four and five percent in the coming year.

Unsurprisingly, Labour leader Ed Miliband jumped on January's VAT rise and the increase in the cost of living as negating today's fuel duty cut and personal allowance rise straightaway.

In an unusually strong House of Commons performance, Mr Miliband continually used the line, "It's hurting but it isn't working", and referred to the "'Del Boy' economics" of the government.

At times, the attacks were personally directed. Mr Osborne was compared to "Norman Lamont with an i-pod" in reference to the 1990s Tory Chancellor who oversaw Black Wednesday.

And there was also a snipe at a recent soundbite by Deputy Prime Minister Nick Clegg when he referred to him as being part of "alarm clock Britain with the snooze turned on".

Of course, the fuel duty and Corporation Tax cuts will ensure Mr Osborne gets the newspaper headlines in the morning.

But, with many more public sector job cuts to follow, both Mr Osborne and Mr Miliband will know that the arguments at the next election will be about the amount of growth in the private sector and the impact of that on the unemployment rate.

At this point, the Institute for Fiscal Studies considers the government's strategy to be a gamble, and it certainly still looks that way from here.


2011 BUDGET DETAILS
Growth forecasts/Fiscal policy
*Growth for 2011 revised down from 2.1% to 1.7%, and 2.6% to 2.5% in 2012
*OBR expects inflation to remain between 4-5% in 2011, to fall to 2% by 2013
*Borrowing below target for 2011 at £146bn, falling to £29bn by 2015/16
*National debt forecast to be 60% of GDP in 2011

Taxation
*Consultation on possibility of income tax and NICs to be merged
*Income tax allowances to be indexed by CPI from April 2012 - this is a tax increase
*Personal tax allowance to increase by £630 to £8105 from April 2012 - higher rate tax band increased by respective amount
*Chancellor announces review of 50% income tax rate - seen as a temporary measure
*NI rate will be increased as previously planned by Labour
*Corporation tax reduced by 2% (not 1% as previously announced) in 2011 before falling a further 1% in the next three years to 23% - bank levy rate adjusted to offset this effect
*Inheritance tax: if more than 10% of estate left to charity, 10% taken off tax rate
*Mileage allowance relief increased to 45p

Levies
*Alcohol: No further changes to those announced in October's Spending Review
*Cigarettes: Rise by 2% above inflation
*Fuel: Duty cut by 1p per litre. Rise deferred until 2012, April 2012 rise deferred until summer 2012. Fuel duty escalator cancelled, measures paid for by North Sea oil firms
*Air passengers: delayed until April 2012

Investment
*Shared equity scheme worth £250m to help first time buyers purchase newly-built homes
*Rate relief holiday for small business buildings extended by a year to Oct 2012, worth £325m
*Extra £100m to help councils repair potholes
*£100m to be invested in science projects
*21 enterprise zones in England to be announced
*At least 24 new University Technical Colleges to be funded, another 40,000 apprenticeship places for young unemployed people
*Public money to help reduce water bills in the south west of England
*Further £2bn to allow "green investment" bank to begin a year early in 2012

See also: BBC - Sky - Treasury
2010 Spending Review: Osborne wields his axe on the welfare state
2010 pre-election Budget: The quiet Budget
2009 Pre-Budget report: Darling sets the dividing line
2009 Budget: The black hole Budget

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