A briefing on the emergency budget
On 22nd June, the coalition government published an emergency budget, setting out the government's spending plans and forecasts for the next 5 years. The government has said it wants to bring down public borrowing and eliminate the structural budget deficit in 5 years, and to achieve this by reducing public spending and increasing taxes - roughly 80% from cuts in public spending, and 20% from increase in taxation.
On 22nd June, the coalition government published an emergency budget, setting out the government‘s spending plans and forecasts for the next 5 years.
There are two drivers of the budget.
• The first is economic - an estimated £850 billion of financial support was provided by the public to the banking sector to stop the banking system from collapsing in 2008/9. Resulting from this is a structural deficit - which means a gap between public spending and revenue, and a growing national debt.
• The second is political - the Conservative Party has policy objectives around changing the role of the state and public services. The Treasury has said that the budget (and the Comprehensive Spending Review to follow) will "shape the reform agenda for this Parliament" and "the scale of the challenge presents an opportunity to take a more fundamental look at the role of government in society".
The government has said it wants to bring down public borrowing and eliminate the structural budget deficit in 5 years (over the course of this Parliament). They will achieve this by reducing public spending and increasing taxes - roughly 80% from cuts in public spending, and 20% from increases in taxation.
The Budget sets out how they want to achieve this:
• Cutting public spending by £32 billion this year, and every year for the next five years. This is in addition to the cuts planned by the previous government.
• The total deficit reduction package is planned to be £113 billion in 2014-15, rising to £128 billion in 2015/16.
• Cutting the budgets of all government departments by 25% over the next four years - except health and foreign aid which are protected.
• Over a third of the savings (£11 billion) will come from cuts to benefits.
• The government expects unemployment to rise slightly, from 7.9 % in April 2010 to 8.1%, but then to fall each year, to reach 6.1% by 2015/16.
Budget breakdown: key announcements
Welfare benefits, pensions, public sector pay
There is a change to how all 'cost of living‘ increases in benefits, tax credits and pensions to be worked out from April 2011 - using the Consumer Price Index, and no longer the Retail Price Index4, which is lower (CPI is 3.4%, RTI is 5.1%).
New benefit rules to be introduced to cut entitlement for sections of the unemployed:
• Time-limiting the receipt of full Housing Benefit for claimants in rented housing, and are expected to look for work
• Require lone parents to look for work when their youngest child goes to school (rather than from 10 years old)
• Introduction of a medical test to claim Disability Living Allowance from 2013 for all new and existing claimants - aiming to cut £1.4 billion.
Housing costs for people on low incomes
• Limiting the amount of Housing Benefit that can be claimed, by introducing a cap and revising how the Local Reference Rent is worked out.
• Cutting Housing Benefit for working-age claimants in social housing who are living in a larger property than their household size warrants.
• Cutting Income Support Mortgage Interest payments for homeowners from October 2010 by changing how it is worked out - in the first instance will be a drop from 6.08% to 3.67%.
• But...increasing the budget for hardship cases (Discretionary Housing Payments) by £40 million, and changing the system to cover the cost of an extra room for disabled claimants who need a carer.
Children and families
• Child Benefit will be frozen for 3 years which means no cost of living increase, a cut of £3 billion by 2015.
• A mix of measures on Child Tax Credits - some on lowest income to see an increase in rate of child tax credit6, but ending child tax credit for families with a combined income of over £40,000, raising the amount taken off your child tax credit depending on your income, and cutting the baby element of child tax credit.
• Stop the Health in Pregnancy Grant from April 2011.
• Limit Sure Start maternity grants to the first child only.
Income benefits for low paid workers
• Cuts in working tax credits: lowering the amount of your income not taken into account from £25,000 to £10,000, and then £5,000.
• The Saving Gateway - Government supported cash savings scheme for workers on low incomes, due to launch in July 2010, has been scrapped.
Pensions and pensioner benefits
• State Pension in April 2011 will rise by 2.5%, the average increase in UK wages, or cost of living increases that year (whichever is highest).
• Commitment to keep some key benefits for older people introduced by the last government: Winter Fuel Payments, free television licences for those aged over 75, free off-peak local bus travel, eye tests and prescriptions for men and women aged over the female state pension age.
• The government wants to review when the State Pension age will rise to 66 years. This change was set to be introduced between April 2024 and April 2026, but the government intends to bring this forward. Consultation on this will start on 28th June.
• A commission has been set up to review the cost of public sector pensions, suggesting future cuts. Their early findings will contribute to the autumn‘s Spending Review, with a full report for next year‘s Budget.
Public Sector Pay
• Freezing public sector pay for two years - which means no cost of living increase, except for those earning less than £21,000 who will get an annual rise of £250.
Taxation - some tax rises, some tax breaks
• Value Added Tax (VAT) to increase from 17.5% to 20%. This applies to the same goods that consumers and businesses currently pay VAT on.
• The Personal Allowance for people on low incomes aged under 65 will increase by £1,000 in April 2011 - this means the point at which you start paying tax will rise from £6,475 to £7,475 for 2011-12.
• Capital Gains Tax will increase from 18% to 28% for higher and middle rate taxpayers
• Special relief on Capital Gains Tax for entrepreneurs has been increased. Entrepreneur‘s relief is a rate of 10% to be paid in CGT out of business sales. This reduced rate did apply to a lifetime allowance of £2 million, and has been increased to £5 million.
• Work with local authorities to freeze Council Tax in 2011-2012 - it does not specify how it will do this.
• Reduce Corporation Tax - tax on profits of private business of all sizes - from 28% to 24% over the course of 4 years from April 2011.
• Reduction in National Insurance (NI) contributions - raising the threshold by £21 per week and reducing NI for the first 10 people hired for some new businesses in targeted areas (i.e. outside London and the Southeast).
• From January 2011, the government will introduce a levy of banking profits of 0.04 % to increase to 0.07% after 2011, which will apply to the balance sheets of larger UK banks and building societies and the UK operations of foreign banks. This is expected to raise around £1 billion in 2011-12 and £2 billion annually from 2012-13.
• The Enterprise Finance Guarantee (EFG) which supports lending to small businesses to get an additional £200 million until the end March 2011.
• No new increase in duty on alcohol, cigarettes or fuel in addition to those in the March 2010 budget. Scrapping the 10% planned increase in cider, and cutting the cost of cider with immediate effect.
Reaction to the Budget has focussed on 3 questions
1) Are public spending cuts of this speed and scale necessary to prevent further financial crisis in the short term and rebalance the economy in the long run, or does it make the economic outlook worse in terms of economic stability, growth and unemployment?
2) Is it fair and proportionate? Are those that can afford to pay being asked to pay enough? Are the banks and big businesses being asked to shoulder enough of the burden? What is the impact on poverty and inequality?
3) The budget goes beyond Conservative and Liberal Democrat manifestos on levels of public spending cuts-does the coalition government have an electoral mandate for the cuts?
What people are saying...
• The Financial Times called it the 'Kill or Cure Budget‘ and describes the time limit for jobless to get housing benefit as "the Cameron version of 'on yer bike'"
• Economists are split on whether they think austerity is the right thing for the economy, with leading economists on both sides.
• The new Office for Budget Responsibility said that recovery would not be undermined by such austerity, and said that Budget measures would cost a maximum of 50,000 jobs.
• The International Monetary Fund reported that the speed of planned deficit reduction is quicker than all other advanced economies except Greece.
• Will Hutton, heading up the government‘s review on public sector pensions, described the cuts as "brutish", called the Budget a ‘scorched earth policy' and questioned whether they were achievable without wrecking the coalition government.
• Richard Grayson, Vice-Chair of the Lib Dems warned colleagues that the coalition had no electoral mandate for this level of cuts, and accused the Chancellor of being ideologically driven.
• Harriet Harman, Deputy Leader of the Labour Party accused the Lib Dems of sacrificing everything they stood for.
• Joseph Rountree Foundation warned about the disproportionate impact of the Budget on the poorest in society. They warn that the 25% reductions in departmental budgets "are likely to hit people in poverty, who are often more dependent on public services than those with more resources. It will also hit those regions that are dependent on public sector jobs and already have high levels of poverty".
• Neil Cleevely, director of policy and communities at Navca "this is further evidence of just how tough public spending cuts are going to be. When the state retreats from providing services the voluntary and community sector fills the gap... We need to know that local charities and community groups will get the support that they need to help communities through these hard times."
• Church Action on Poverty "Many of the poorest members of society will still be hit hard by cuts in benefits and public services and the increase in VAT...What is particularly troubling is the way in which the welfare budget is routinely described as 'out of control', creating 'dependency' or 'investment in failure'. These are easy judgements to make if you are a well paid MP or journalist - but far from the reality of those who struggle to make ends meet...No one should be under any illusions about the impact of the spending cuts still to come."
• Phil Bloomer, Oxfam's Director of Campaigns and Policy criticised the proportion being paid back by the banks through the banking levy, "The government has missed an opportunity to raise more money to protect the poorest people in the UK from spending cuts and VAT rises, as well as helping tackle poverty and climate change overseas, and help those hit hardest by the mess the banks made."
• Toby Blume, Urban Forum "For all the talk of 'fairness', an initial assessment of the budget appears likely to hit poor people very hard... The levy on banks is welcome, as is the increase in the income tax threshold, but the bank tax is expected to raise only £2bn per year. This is a drop in the ocean when set against the systemic risk banks pose, the profits they‘ve generated and the size of the recent bailout."
• Mark Serwotka, leader of the public service union PCS "This is not a progressive budget to help the country recover from the worst economic crisis in living memory, it is a programme of despair for millions of people who did not cause the recession and should not be made to pay for it."
• Brendan Barber, TUC General Secretary "This budget is economically dangerous and socially divisive. Unemployment will continue to be high, and anyone leaving school or college in the next five years faces a bleak future."
What the Government does next
Government departments are currently being asked to submit draft plans within their reduced budget, outlining where the cuts will be made to make up the distribution of the £32 billion cuts.
These draft plans will be examined in government and outside, with final plans being considered in the Comprehensive Spending Review, which will be presented on 20th October 2010.
The Comprehensive Spending Review (CSR) is when the Treasury decides the final departmental settlements. The settlement this time will be for the whole parliamentary term, which they are seeking to fix at 5 years.
As well as setting out details of the cuts, the CSR will also decide how the planned changes to the benefits system, public sector pensions and tax credits will come in. More broadly the Government has said that it will "shape the role of the state in the future".
Under the last government, Public Service Agreements (PSAs) were used to prioritise funding. These have been abolished. For this CSR a new Public Expenditure Committee has been set up, to advise the Treasury on allocations. It will look at prioritisation of spending, public sector reform, and the findings of a number of reviews set up by the government - including reviews on public sector pensions, defence, local government finance and legal aid.
The government is also setting up a Spending Review Challenge Group - made up of individual experts within and outside of government, to critically examine all draft plans.
Details of public engagement on the Budget and the cuts are still coming out. There will be a series of events to consider welfare reform, cross-cutting issues like localism - with think tanks, academics, trade unions, local government representatives, business, and interest groups invited to take part.
There will also be wider consultation by departments over the summer, to inform departmental discussions with the Treasury in the autumn.
• For a more detailed summary of the emergency budget click here
• To see the budget in full click here
• For further details of the CSR click here