George Osborne, the Chancellor of the Exchequer, today outlined the coalition government’s financial plans in an emergency budget. It was widely predicted to be a tough one, but with £11 billion of welfare reductions and a rise in VAT it will hit many people even harder than expected.
The theme of this budget was simple: cuts. Tough but fair was Osborne’s description, although not everyone would agree having seen the details.
We all know that there is a massive deficit in the public purse, but the big political question was always whether immediate cuts were required, or whether this would risk a so called “double dip” recession, where the actions to recover from one recession causes an immediate second one. Labour argued in the election that the cuts should be delayed until next year for this very reason.
The softening up process has being going on pretty much from the moment that the new government took charge – blaming their predecessors for the position inherited in time honoured political fashion and predicting hard times ahead.
And there have been plenty hints in the media over the last few days about the contents of this budget. £40billion in cuts to be made and £10 billion in new taxes to be raised were the headlines. And this is on top of £6.2 billion of cuts already announced by the coalition government.
George Osborne stood up in front of a packed House of Commons just after 12:30pm to deliver his first budget. He started by attacking the Labour government’s record, arguing that a new credibility would be achieved under the coalition, and predicting both economic growth and falling unemployment over the next few years. He also stated that, as expected, lower spending would be the priority rather than higher taxes.
The Chancellor then outlined headline figures for government departments, with only the NHS and international aid surviving projected cuts of around 25%. Full details will be given in October following a full spending review.
Once the political content was out of the way, Osborne got onto the detail by announcing a range of specific measures.
He started by attacking the public sector, with a two year pay freeze for all workers earning over £21,000 per annum. Those earning below this level will get a rise of just £250 per year. Public sector pensions will also be reviewed.
Cuts in benefits came next with a total of £11 billion to be cut from the total bill. Upgradings for welfare payments will be reduced. Tax credits will be cut for families earning over £40,000 and many one off payments will be abolished. Child Benefit will be frozen for three years and Maternity Grants will be abolished for all but the first child.
A new medical assessment for Disability Living Allowance claimants will be introduced to cut the numbers eligible. Housing Benefit will be reformed by restricting payments and setting maximum levels, cutting £1.8 billion a year.
Osborne argued that recovery must come from the private sector. Employers will pay slightly less in National Insurance and Corporation Tax is to be cut by 1% each year for the next four years.
The banks were targeted in what will be a popular move with some form of tax on profits to be introduced, which is expected to bring in at least £2 billion each year. A green investment bank will be created and digital investment is to be increased.
Then Osborne turned to personal taxation.
He announced that VAT will rise to 20% in January, which was not at all popular in the House, and won’t go down well with the public.
A rise in VAT was widely predicted, although neither of the coalition partners actually proposed this measure during the election campaign, and indeed the Lib Dems actively argued against it. Pictures of Nick Clegg with a poster warning of a secret Tory VAT bombshell will be making a reappearance very soon.
The VAT rise will result in a rise in inflation and this could have a knock on effect on interest rates. And it is also a regressive tax, hitting those on lowest incomes hardest.
Personal income tax allowances are to be increased, which will mean many people will pay around £170 a year less income tax, and 880,000 on low wages will pay no tax. And Capital Gains Tax will rise for higher rate taxpayers.
Osborne concluded by calling his measures “decisive” and “a progressive budget”, echoing Clegg’s remarks on progressive cuts. And he finished by once again blaming past mistakes for his cuts.
Harriet Harman for Labour immediately went onto the attack, calling the budget bad for growth and a threat to recovery. She pointed out that the Office for Budget Responsibility, set up by Osborne himself, had both downgraded growth forecasts and predicted higher unemployment as a result of his budget.
She also asked how Lib Dems could support a package containing so many measures that they had campaigned against, a charge which clearly hit the mark.
It was widely reported that Nick Clegg wrote to all of his MPs this week, arguing that the cuts were necessary and that his party was not dancing to a Tory tune. But the very fact that he had to try to keep them on side says everything.
Harman went on to attack the supposed fairness of Osborne’s measures, especially the regressive VAT rise, which will hit the poorest in society the hardest. She reminded the House that Osborne had said during the election campaign that there were no plans to raise VAT, and that the Liberals had warned against it.
She argued that this was an ideological attack by the Tories aiming for a reduction in the state, rather than being an economic necessity, and that the Lib Dems had sold out their supporters by gaining ministerial jobs at the cost of thousands of people being made unemployed.
Harman finished by arguing that a budget for recovery had been required, but instead a reckless assault on the lowest paid was being made.
This is a budget that went further than expected in benefit cuts and tax rises. The Tories will take much of the political heat but many Lib Dems will be feeling very uneasy about their part in this budget.
And it is the rest of us who will pay the price.