Wednesday, 23 March 2011

Budget 2011

1. The politics and economics of today’s Budget

A one-time-only opportunity

1.1 Chancellor George Osborne’s Budget today was extremely important for the future of the Coalition and, potentially, for Mr Osborne’s own future. Even though we are less than a year into this Government, today represents arguably the last – and best – chance to set a strategy for growth and electoral success in 2015.

No more room for savings

1.2 Mr Osborne’s earlier “emergency” Budget last summer was designed to identify where the painful spending cuts would come. Having done that, he had very little “wriggle room” either to adjust the cuts programme or to identify other savings – he told everyone last summer that the emergency Budget was a one-off and permanent change to spending patterns.

Growth good…

1.3 Better economic times therefore had to come from real growth, not more savings. With growth so sluggish and little economic good news to tell, the Chancellor’s task today was to produce proposals which would remove his perceived structural obstacles to a brighter, high-growth future. Without removing obstacles now, there would be little chance to make an impact before the next General Election: the UK economy simply doesn’t move fast enough for such policy changes to show results.

…but reform better?

1.4 Mr Osborne has a deeper ideological agenda than simple growth. He wants permanent systemic fiscal reform. So today’s Budget wraps up serious structural reform proposals in the language of growth promotion and entrepreneurship. For example:

· By talking about tax “simplification” and “removing anomalies” between income tax and National Insurance, for example, the Chancellor can give the impression of reducing taxes and increasing personal spending power, whilst making future revenue collection more responsive and future fiscal policy levers easier to manipulate.

· By promising to make tax “more transparent”, and better linking personal deductions to public spending, he hopes to encourage a culture where taxpayers monitor Government expenditure more closely and are more resistant to “Big Government” projects.

A significant prize awaits

1.5 If he is successful, the Chancellor will probably have altered the UK’s tax and benefits system irrevocably, and he clearly stands ready to gain electoral and personal political success. Labour’s Budget response today was necessarily sharp and combative, but the Opposition party will need strong predictive modelling to establish which of Mr Osborne’s wheezes today are designed genuinely with growth in mind and which are designed for the 2015 General Election.

2. The Budget headlines

The Chancellor said that today’s Budget “is about moving from rescue to reform, and reform to recovery”. He said the measures he announced were “fiscally neutral across the period” and, in a nod to his strategic aims, published his “Plan for Growth” alongside the traditional Red Book of facts and figures about the Budget Statement. These are the key points from today’s Budget Statement:

Economic forecasts

2.1 Forecasts by the Office for Budget Responsibility show annual GDP growth forecast for 2011 revised down to 1.7%. In 2012, it is expected to hit 2.5%, then 2.9% in 2013; 2.9% in 2014; and 2.8% in 2015.
2.2 OBR expect inflation to remain between 4 and 5% for most of this year, before dropping to 2.5% next year and then to 2% in two years’ time.
2.3 The inflation target will remain at 2% CPI.
2.4 Borrowing to fund the deficit this year is now set to come in at £146 billion, below target. It will fall in subsequent years to £122bn; £101bn; £70bn; £46bn in General Election year 2014-15; and £29bn by 2015-16.

Business and general taxes

2.5 There will be a consultation on the Office of Tax Simplification’s proposals to merge the operation of National Insurance and Income Tax.
2.6 The Budget abolishes 43 complex tax reliefs and removes over 100 pages from the tax code.
2.7 From April 2012, the default indexation assumption for direct taxes will move to CPI but there will be protection through this for employers National Insurance Contributions.
2.8 Also from April, corporation tax will be reduced by 2% not the previously-announced 1% and will continue to fall by 1% in each of the following three years.
2.9 No further change to VAT rates or categories this year.
2.10 Major changes were announced to the Enterprise Investment Scheme and generous new allowances for “business angels” introduced to encourage investment in start-ups and SMEs.
2.11 Mr Osborne confirmed that he views the 50p income tax rate “as a temporary measure”.
2.12 The business rate holiday for small businesses is extended for another year – to October 2012.
2.13 From April small companies research and development tax credit will rise 220% this year and 225% next year.


2.14 2.14 Funding for 12 further university technical colleges.
2.15 Extra 40,000 apprenticeships for young people out of work.
2.16 Funding for 100,000 new work experience placements.

Regulation and legislation

2.17 £350 million worth of specific regulations will be scrapped and Lord Young’s health and safety recommendations will be implemented in full.
2.18 The Treasury is publishing a new strategy paper, “Tackling Tax Avoidance” and will close down various Stamp Duty Land Tax avoidance loopholes, tighten capital gains rules for companies; end the practice of disguised remuneration and “tackle the exploitation of low value consignment relief that has left our high street music stores fighting a losing battle with warehouses in the Channel Islands”.
2.19 The tax avoidance measures tackled will raise £1 billion a year.

Other points of note

2.20 The Green Deal remains on schedule and Mr Osborne said, “I now confirm that we will act to incentivise and encourage its take up”.
2.21 The Green investment bank will begin work one year early in 2012, with an extra £2bn in funding.
2.22 £100m funding for science facilities announced.

3. A cautionary note

Mind the gap

2.23 Budget Statements are famous for “gaps” – the hidden detail and stealth consultation that eventually emerge from the mass of paperwork released on the day. Over the next week, think tanks, MPs, academics, tax and economic experts will pick the Budget apart word by word and graph by graph.

Keep on track with PSA

2.24 As and when greater detail emerges on key issues, we will let you know. However, if there is something in particular that you would like us to look out for, or to follow in detail, please let us know.

PSA Communications
109 Borough High Street
London. SE1 1NL

020 7744 6338

Budget 2011

Highlights include:


  • 2011 growth cut to 1.7% (from 2.1% forecast in Nov) 
  • Borrowing £146bn this year, £122bn next year. 
  • Inflation to remain between 4-5% for the rest of the year. 
  • Borrowing to be 146 bn this year, 122 next, then 111 and predicted to be 29bn by 2015-16. 

  • Personal tax allowance to rise a further £630 to £8,015 in April 2012 
  • 50% tax threshold is temporary measure. 
  • 43 complex tax reliefs abolished. 
  • From April 2012 indexation assumption for direct taxes will move to Consumer Prices Index. 
  • Consultation on merging NI and Income tax. 
  • Tax avoidance clampdown to raise £1bn this year. 

  • Corporation tax reduced by 2% and then further 1% three years after that 
  • In Plan for Growth, £350 million worth of business regulations will go. 
  • Lots of planning changes including reclassification of land and time-limits on applications 
  • Income Tax relief on Enterprise Investment Scheme to increase from 20% to 30% in April 2011. 
  • From April small companies R&D tax credit will rise 220% this year and 225% next year 
  • Commitment to improve the intellectual property regime. 
  • Enterprise Zones: 21 in total, 10 initially. Businesses inside zones get 100% discount on rates and superfast broadband 
  • Further 10 announced in the summer – LEPs asked to come forward with proposals. 
  • £100m funding for science facilities 
  • Green investment bank will begin work one year early in 2012, with an extra £2bn in funding. 
  • Introduction of a new carbon price floor. 
  • Funding for 12 further university technical colleges 
  • Extra 40,000 apprenticeships for young people out of work 
  • Funding for 100,000 new work experience placements 
Big Society
  • Gift aid cap increased from £500 to £2,500. Also 10% off inheritance tax discount if you leave 10% of an inheritance to charity.

    Budget 2011