Emergency budget 2010: City reaction
Updated on 22 June 2010
Chancellor George Osborne said in his budget speech he wants a sign to go up over the British economy, that says "Open for Business". Channel 4 News reports on the reaction from the City.
While business taxes were given some respite in Osborne's "tough but fair" emergency budget, the banking sector was slugged with a much-anticipated levy.
From January 2011, the government expects to raise £2bn a year from a banking levy.
Despite insisting that he had no plans to raise VAT in the run-up to the general election, the Chancellor hiked VAT today from 17.5 per cent to 20 per cent.
Meanwhile, corporation tax will be cut by one per cent every year for the next four years, pulling it back by 24 pence in every pound.
David Frost, director general of the British Chambers of Commerce said: "The government's decisive moves to cut the deficit will have positive effects on business and investor confidence. Even more importantly, the Chancellor's message that Britain is open for business will be welcomed by companies the length and breadth of the country, and across the globe."
David Kern, the group's chief economist, said: "The budget could be a defining moment in Britain's economic history. If successful, the Chancellor's plan could put the UK on the path toward a sustainable recovery."
Meanwhile, ratings agency Fitch said the budget should "materially strengthen confidence" in UK public finances and the country's AAA credit rating if delivered upon.
Business reaction to:
- Banking levy
- VAT
- Insurance
- Property
Richard Lambert, Confederation of British Industry (CBI) Director-General, said there was clear recognition in the budget of the role that business needs to play in getting the economy back into shape, and generating the jobs and wealth needed to sustain economic recovery.
He added: "Mr Osborne is close to achieving his 80:20 ratio of spending cuts to tax increases, which is so important to sustaining long-term growth.
"He has struck a sensible balance on Capital Gains Tax, limiting the impact of the increase on entrepreneurial activity and long-term savers.
"The 5-year route map for Corporation Tax provides much-needed consistency and certainty. Taken together with proposals on foreign profits and intellectual property, these will help prevent and could even reverse the flow of companies overseas.
"This budget is the UK's first important step on the long journey back to economic health. The autumn spending review, and the re-engineering of public services, will be equally challenging."
Institute of Directors director general Miles Templeman said: "The economy needed faster and deeper deficit reduction and that's exactly what the Chancellor has delivered. Equally important to the scale of deficit reduction is the way it is done.
"The Chancellor has chosen the right route, by concentrating overwhelmingly on closing the fiscal gap by lower spending instead of higher taxation. We do not believe the budget will threaten economic recovery. Quite the contrary, it is likely to improve the economic outlook by showing the public finances are finally being brought under control."
However, Dr John Philpott, chief economic adviser at the Chartered Institute of Personnel and Development, said: "The Chancellor has introduced what must surely rank as the most astonishing UK budget statement in modern times. Mr Osborne's combination of £32 bn additional spending cuts by 2014-15 and an £8 bn net tax hike amounts to an unprecedented fiscal squeeze, including an extremely severe clampdown on the welfare bill.
"Yet both he and the independent Office for Budget Responsibility (OBR) reckon there is a greater than evens chance that the government will meet what the Chancellor calls its fiscal mandate with barely any serious short-term impact on economic growth and employment."
Banking levy
Meanwhile, the British Bankers' Association accepted the new banking levy and promised to fully cooperate.
However, it warned that it must fight to make sure bank taxes do not damage "our national interests or provide an unfair advantage for other businesses operating here".
The BBA said the UK is not the only country creating some form of bank levy, "so bank levies need to be co-ordinated internationally: they must not prevent the industry in the UK from being able to compete. It is essential that the international banks do not find themselves taxed multiple times for the same thing."
VAT bombshell
Today's budget announcement that VAT will rise to 20 per cent from 17.5 per cent will be a blow to Britain's 4.8 million small businesses.
British Retail Consortium director general Stephen Robertson said: "We didn't want a VAT increase. It'll hit jobs, consumer spending, the pace of recovery and add to inflation. But we accept the Government has no easy options. It's some consolation that the range of VATable products isn't being extended."
The Federation of Small Businesses (FSB) also warned that rises in Employer National Insurance Contributions (NICS) were not completely reversed.
John Walker, National Chairman, Federation of Small Businesses, said: "The measures announced in the Emergency Budget will go a long way to reducing the deficit and will please the 93 per cent of FSB members who called for a clear plan on tackling the country’s debt.
"The increase in VAT to 20 per cent will however, hurt small firms who will have to pass the increase on to their customers, unlike big business which can absorb the cost.
"We welcome moves to give a national insurance holiday to start-up firms, but are concerned that with 70 per cent of firms operating below capacity, those businesses already trading will not be helped. We need to see a full reversal of NICs increases to fully offset the ‘tax on jobs’ which the previous administration initiated."
For many small businesses insurance on many items is a must and the proposal to increase Insurance Premium Tax (IPT) from five to six per cent is a tax on responsible business and should be reversed.
Jake Ridge, small business energy expert at uSwitchforbusiness.com, said: "Small businesses are battling to recover from the recession. The VAT hike will not only cost many money to implement, but it will also make trading even harder. SMEs are concerned that the VAT increase will deter consumers from spending, push costs up and make it harder for them to compete. Just one in ten small business owners think that today's move will not have an impact on their business.
Insurance
The British Insurance Brokers' Association (BIBA) said it was disappointed that the government has bumped up its lower rate of insurance premium tax (IPT) from 5 per cent to 6 per cent and higher rate of IPT from 17.5 per cent to 20 per cent.
Eric Galbraith, BIBA Chief Executive, said: "This is a tax on protection, BIBA's research last year demonstrated that businesses and consumers were reducing insurance cover as a result of the recession and we are concerned that increases to insurance premiums as a result of IPT could lead to even further underinsurance or even a lack of insurance protection. The last thing people need in a financial crisis is a higher insurance bill."
Consumers and businesses will see their motor, property and travel insurance premiums increase as a result and BIBA is warning customers that cutting out or reducing essential cover could be a false economy.
But many commentators expected the rate to rise far more steeply, even doubling and last week, AA Insurance warned Treasury officials of the consequences of a sharp rise in IPT, such as a jump in the number of uninsured drivers.
Simon Douglas, director of AA Insurance which publishes the influential quarterly British Insurance Premium Index, said that the rise will not be welcomed by people buying home and car insurance. "But I'm relieved that the increase wasn't any greater than that and it shows that the Chancellor has been listening to our concerns.
Property
Ian Potter, operations manager of the Association of Residential Lettings Agents (ARLA), said: "The planned rise of Capital Gains Tax may not be as extreme as many had anticipated, but it still comes with little consideration for the needs of landlords.
Because of this, the Chancellor risks driving those landlords paying the higher rate of tax from an already very fragile housing market, at a time when they should be actively encouraged to stay and, ideally, further invest.
"In particular, neglecting to include rollover relief is a big gamble, as many landlords will now be penalised by CGT – and hit by Stamp Duty – when they sell one rental property and purchase another. This may further disincentivise some landlords from remaining in the Private Rented Sector (PRS) and negatively impact the overall supply of rental property.
"The PRS represents an extremely important part of the housing market, providing much-needed flexible and affordable housing to the UK. With this rise in CGT, the Government is taking a huge risk in destabilising the future supply of homes to the UK".
Council of Mortgage Lenders (CML) director general Michael Coogan said today's measures came as no surprise.
"We understand the tough choices that the government has to make - but obviously that does not mean they are attractive.
"In a world of imperfect choices, steps that help the economy to recover and help to maintain mortgage rates at affordable levels for most people are the measures that will underpin a healthy housing market in the long term.
"But in the short term pain is likely, as the effect of tax rises on household finances dampens the already fragile recovery in house-buyers' confidence, housebuilding is affected, and support for housing costs across all tenures is curtailed.
"In housing terms this may be the "age of aspiration" as the housing minister said recently, but against an austere backdrop there is a long way to go before the supply of housing, or the ability of would-be home-owners to achieve their aspiration, are likely to show any significant pick-up."
