22nd June 2010
On Tuesday this week I sat in the House of Commons to hear George Osborne deliver his first Budget. This was one of many Budgets which I have listened to over the years, but it was the only one to which I had contributed myself – in my short time in the Treasury as Chief Secretary. Frankly, it was frustrating to be watching a Budget that I had helped shape in some small way, without being a part of it all on the day, but that is now all water under the bridge.
This Budget was always going to a tough one. Britain has a mind-boggling £150,000,000,000 (£150bn) hole in its public finances. That means our Government is having to borrow an extra £3 billion EACH WEEK to meet all of its spending commitments. That massive borrowing threatens higher interest rates, market instability, and the economic recovery. And borrowing has to be paid back at some stage – so we have been placing a huge burden of higher future taxes on our generation and on our young people.
The “Party” has had to stop, and the Chancellor had to deliver some difficult news. Value Added Tax is to rise from 17.5% to 20.0% next year. However, items that VAT is currently not charged on will remain at 0% (VAT free) – items such as food and children’s clothes.
Spending is also going to be cut back. Some Government departments will see falls in their budgets of up to 25% over the period from 2011 to 2015. Nobody can remember cuts on that scale. Welfare payments are also being trimmed, with child benefit frozen for 3 years.
There will also be some tough decisions on public sector pay and pensions. The private sector has already experienced pay cuts and pay freezes over the last 2 years of recession, and now the public sector will be affected too.
There will be a public sector pay freeze from 2011 to 2013, and a new Commission under former Labour Minister, John Hutton, will look at the affordability of public sector pensions.
The result of all this will be to slice £40bn off the annual borrowing totals by 2014/15, and £120bn over the 5 years to 2015.
What that means is that the tough medicine will deliver. By 2014/15, borrowing will have fallen from the level of £155bn in 2009/10 to £37bn – just 1% of total national income.
The Chancellor admitted that the Budget is tough, but it is also fair. The starting rate for paying income tax is being raised by £1,000 to £7,475 in April 2011, taking almost 900,000 people out of income tax completely. This will in part be paid for by a higher rate of capital gains tax for some higher rate taxpayers, stopping some tax avoidance by those on upper incomes.
Lower paid public sector workers will be exempt from the pay freeze, and those with incomes under £21,000 per year will still receive pay rises.
The banks will pay more, with a special new tax which will raise £2.5 billion per year, and the child tax credit for those on lower incomes will be raised.
And on public spending, the budget of the National Health Service will be protected from cuts.
Finally, the basic state pension will once again be linked to the higher of prices, earnings or 2.5% from April 2011, restoring the earnings link for pensioners for the first time for almost 30 years!
Taken together, this means that although the package is pretty tough, those on lower incomes will not be the big losers. Indeed, it is the 10% of highest earners who will pay most extra as a consequence of the budget – both in total cash, and as a share of their incomes.
So, the country is in for some tough years, but at the end of the Parliament the state of the public finances will be much, much, better. And the action will be taken while protecting those on lower incomes and while protecting key front-line services.
And the good news is that because we are taking this action, it will be much easier for the Bank of England to keep interest rates low. That will be good news for businesses and mortgage-payers across the country.
Best wishes,
David.