The UK’s Chancellor, George Osborne, earlier this week revealed the “Emergency Budget” of the fledgling coalition government. The budget is aimed at reducing the structural deficit (approximately $130 billion) and achieving a balanced budget by 2015/16. It will be governed by Osborne’s “80:20 rule”. 80 percent will come from reducing costs and 20 percent from increasing taxation. This budget comes close to that with the Chancellor admitting it was in fact only 77:23.
Sin taxes are frozen on cigarette and alcohol but a levy has been imposed on banking. The capital gains taxA capital gains tax is levied on the profit made from selling an asset and is often in addition to corporate income taxes, frequently resulting in double taxation. These taxes create a bias against saving, leading to a lower level of national income by encouraging present consumption over investment. and sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. both increased to 28 percent and 20 percent respectively. Personal taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. allowances (individual standard deductions) are to rise, lifting 880,000 people out of taxation altogether. Corporate tax is to decrease 1 percent year-on-year for four years and the previous government’s proposed increase in payroll taxation of 1 percent is to be scrapped, making this quite a good budget for private sector jobs growth.
Public sector jobs on the other hand face a two-year pay freeze for those earning over $31,000 whilst those earning less are in for a $370 pay rise. The Royal Family is also going to have to count the pennies as the British people will only be giving them $11.5 million for caviar and champagne this year. Will Hutton (a socially democratic author and think-tanker) is being put in charge of a fair pay review that will ensure senior public-sector executives are paid no more than 20 times the salaries of those at the bottom.
With health and foreign aid ring fenced other departments face a real term drop in their budgets, over four years, of 25 percent. Welfare, which accounts for a significant percentage of spending, was also targeted. Osborne phrased this nicely by announcing that he was going to “significantly improve [the] incentive to work” of people currently claiming Disability Living Allowances (DLA) as well as increasing the retirement age, abolishing tax credits for the rich and freezing child benefit payments.
The newly established Office of Budgetary Responsibility (OBR) has been set up to provide independent economic forecasts in a move to elevate such forecasts out of the political arena. This move of course stressed just how much the previous government had manipulated figures and forecasts for political purposes and re-enforced the tone of the budget which was: “this is a tough budget but blame the other guys.”
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