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Budget: Osborne's 'tough but fair' budget

By Channel 4 News

Updated on 22 June 2010

VATman, benefit basher and public spending slasher, or a responsible and fair-minded chancellor - you decide, writes political editor Gary Gibbon, as George Osborne raises VAT to 20 per cent in a raft of spending cuts and tax rises.

Chancellor George Osborne leaves Downing Street to present his first budget (credit:Reuters)

VAT will increase to 20 per cent from 4 January next year, with the chancellor insisting that the move was "unavoidable" in dealing with the "years of debt and spending" under Labour.

However currently exempt goods, such as childrens clothes and food would be unaffected. 

"This is an emergency budget, so let me speak plainly about the emergency that we face," Mr Osborne told MPs.

"The coalition government has inherited from its predecessor the largest budget deficit of any economy in Europe with the single exception of Ireland.


"One pound in every four we spend is being borrowed. What we have not inherited from our predecessor is a credible plan to reduce their record deficit."

Mr Osborne promised to balance the deficit within the next five years, saying that 77 per cent of the measures to do so outlined in the budget are spending cuts, while 23 per cent would come from tax rises.

The chancellor acknowledged that the plans in the budget will slow growth initially, but said it would pick up again towards the end of the parliament.


Political editor Gary Gibbon writes:
He's VATman, the benefit basher and public spending slasher! Or he's a responsible and fair-minded chancellor, making sure (he hopes) that Britain is living within its means, borrowing only for capital spending and nothing else by the end of this Parliament, upping Labour's deficit repair job by 60 per cent, adding £40b to the fiscal consolidation and protecting the state pension and poorer households' child tax credits into the bargain. You take your choice.

VAT will do some of the heavy lifting in this budget – the tables suggest it's meant to bring in £13.5bn by 2014-15. The Tory election line of "no plans to increase VAT" looks a little implausible now to some.

They'll say they needed it to help with the Lib Dem tax threshold rise and the Lib Dems appear to have put up little fight against a tax hike they campaigned furiously against in the election.

Ah, the election! When we were only discussing one hard figure, the £6b in year cuts. It does look like an increasingly dishonest election campaign across the board now.

Tories and Lib Dems will say that was Alistair Darling's fault – he should have laid out fuller spending plans and then everyone else would've had to step up to the plate and be clearer about their plans. But on any audit, the level of information shared with the electorate of the pain ahead was puny. Well, now we know.

Read more from Gary Gibbon's blog


Mr Osborne quoted the Office for Budget Responsibility (OBR) estimates for growth this year of 1.2 per cent and 2.3 per cent next year - compared to its previous forecasts of 1.3 per cent and 2.6 per cent under Labour's plans.

However, Mr Osborne said that from 2012 growth would pick up to 2.8 per cent, then 2.9 per cent and 2.7 per cent, compared to previous OBR forecasts of 2.8 per cent, 2.8 per cent and 2.6 per cent.

Mr Osborne said borrowing would fall from 10.1 per cent of GDP this year to just 1.1 per cent in 2015-16, while the underlying current budget deficit would move into surplus by 2014/15 - a year earlier than planned.

Borrowing this year is now expected to be £149bn compared to an estimate of £155bn under the previous government's plans. It will then reduce to £116bn, £89bn, £60 bn, £37bn, and £20bn in the following years.

He said that, with the exception of health and overseas aid, government departments will face spending cuts of 25 per cent over the next four years.

Budget 2010:
Welfare benefits cut
How will child tax credits, benefits, housing allowances and pensions be affected? Read more here.

Public sector pay freeze
The chancellor unveils freezing pay for public sector workers over two years. Read more here.

VAT to rise to 20 per cent
Will the VAT rise hit the poorest people the hardest? Read more here.

Emergency budget: will you be out of pocket?
Channel 4 News analyses how the measures will affect us all. Read more here.

City reaction
How did the City react to the budget's VAT hike and banking levy among other moves? Read more here.

Cathy Newman FactChecks the budget   Read more here


Public sector pay will be frozen for two years for staff earning over £21,000, while the government will accelerate the increase in the state pension age to 66.

Changes to welfare will account for £11bn worth of savings by 2014/15, the chancellor said, with changes to child benefits, housing benefits and the disability living allowance.

Child benefits will be frozen for three years and tax credits will be slashed for those earning over £40,000 a year.

Housing benefit will be reduced by £1.8bn per year by the end of the parliament, with weekly payments capped at £400. A medical assessment will also be introduced for disability living allowance claimants from 2013.

But widely trailed plans to raise personal allowances for basic rate tax payers by £1,000 to £7,475 from next April were kept, plans which Mr Osborne said will take 880,000 people out of income tax altogether.

Casualties of the chancellor's budget
The battles lines have been drawn in the government's first budget, and public sector workers, the vital services they provide, and the poor, sick and vulnerable people who depend on them, are in the firing line, writes Dave Prentis, general secretary of UNISON, for Channel 4 News.

Freezing public sector pay, when inflation is running at 5.1 per cent and VAT is going up will mean a real cut in living standards for millions of ordinary workers and their families.

Economic recovery will be another casualty, as the government's attack on pay for nurses, social workers, paramedics, and PCSOs will hit spending power, and the 25 per cent departmental cuts will have a devastating impact on jobs, driving down much-needed demand in our economy.

The chancellor's approach is not just damaging, it's based on a fraud. Cutting back the public sector will not inevitably lead to a rise in private sector activity. And while we wait for the chancellor's dreams to come true – private sector recovery - the economy will "bottom out", meaning misery for millions, raising the spectre of breadline Britain.

Business taxes also got some respite, as the chancellor announced plans to cut corporation tax by one per cent per year for the next four years, bringing it down to 24p in the pound.

Banks, however, will be hit with a levy from January 2011 that the government expects to raise £2bn per year.


The Federation of Small Businesses did welcome the move to reduce the small companies tax rate to 20 per cent, but warned the VAT hike will hit small businesses.

Its National Chairman, John Walker, said: "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."

The capital gains tax hike was smaller than expected, rising by 10 per cent to 28p per pound on non-business assets for higher rate taxpayers from midnight tonight.

Julie Patterson, director of authorised funds and tax at the Investment Management Association (IMA) said: "The chancellor's decision to maintain the capital gains tax threshold at £10,100 is very welcome. This provides an important buffer for those on modest to middle incomes against capital gains arising simply from inflation.

"It keeps thousands of basic rate tax payers out of complex annual tax calculations as they draw down their savings during retirement. Preserving the threshold sends an important message that people should continue to be encouraged to save for the long term."

Ratings agency Fitch said the budget would "materially strngthen confidence" in the UK's public finances. The firm's head of sovereign ratings, David Riley, said: "Fitch's preliminary assessment of today's Budget is that it sets out an ambitious deficit reduction path that, if delivered upon, will materially strengthen confidence in UK public finances and its 'AAA' status."

Figured it out yet? The budget in numbers
149000000000 pounds - public sector net borrowing forecast this year.
20000000000 pounds - amount expected to be raised every year from the new bank levy
7475 pounds - personal allowance for basic rate tax payers from next April
85 times the chancellor banged the dispatch box during his speech
66 retirement age the government plans to introduce for everyone
55 minutes George Osborne took to deliver his budget
3 years child benefit will remain frozen
3 sips of water drunk by George Osborne during his budget speech
1 opportunity the chancellor can use the old red budget box before it is retired
0 rise in duty on alcohol, tobacco and fuel

More key numbers from the budget here


'Same old Tories'
Acting Labour leader Harriet Harman condemned the budget, saying: "This is a Tory budget that will throw people out of work, that will hold back economic growth and will harm vital public services. It's the same old Tories."

Ms Harman continued: "The chancellor says his top priority is to cut the deficit.

"In order to get the deficit down, you need to keep economic growth up and you need to keep unemployment down.

"Today's budget is bad for growth and that will make it harder to cut the deficit."

She went on: "Today's budget is bad for jobs and that too will make it harder to cut the deficit."

She also turned her attention to the Liberal Democrats. "How could they support everything they fought against, how could they let down everyone who voted for them, how could they let the Tories exploit them?" she demanded.

"The Liberal Democrat leaders have sacrificed everything they ever stood for to ride in ministerial cars and ride on the coat tails of the Tory government."


However, Liberal Democrat business secretary Vince Cable told Channel 4 News: "A year ago the reform pamphlet warned of a budget that was very similar to what we had today.

"Nick Clegg made similar announcements about cuts. We, before anybody, identified the scale of cuts and the specifics of things that had to be done - on tax credits for example."

Labour's Rachel Reeves (Leeds W), a former Bank of England economist, said Mr Osborne had "chosen to ignore the harsh lessons from history" in 1990s Japan and 1930s US.

"Despite his talk of a plan for growth we are now facing, as a result of today, the very real prospects of a double dip recession," she said.

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