June 2010 United Kingdom Budget
Encyclopedia
The June 2010 United Kingdom Budget, officially known as 2010 Budget - Responsibility, freedom, fairness: a five year plan to re-build the economy, was delivered by George Osborne
, Chancellor of the Exchequer
, to the House of Commons in his budget speech that commenced at about 12.30 p.m on Tuesday 22 June 2010 (just 90 days after the previous budget speech
). It was the first budget
of the Conservative-Liberal Democrat coalition formed after the general election of May 2010. The government dubbed it an "emergency budget", and stated that its purpose was to reduce the national debt accumulated under the Labour government.
In his budget speech Osborne quoted data and forecasts made by the independent Office for Budget Responsibility
that was formed by the coalition soon after they took up office.
The preceding budget
of the Labour Party
in March was only partly enacted due to the calling of the election.
He said the country was set to miss the previous government's "golden rule
" in the current cycle by £
485bn.
The Chancellor said he expected consumer price inflation (as measured by the Consumer Price Index
) to reach 2.7% in 2010, above the target of 2%.
He forecast that unemployment would peak at 8.1% in 2010, falling over each of the next four years.
Osborne said the state accounted for "almost half" of all national income, including the escalating cost of debt interest, which was "completely unsustainable".
deficit by 2015–16. The balance of tax rises to spending cuts in his budget was 23% to 77%.
Taxes
Income tax personal allowance
s for people under 65 years old will be raised by £1000 from April 2011, taking about 880,000 people out of the tax system and reducing income tax
on the low-paid by £200 p.a.
The main rate of VAT
will increase from 17.5% to 20% on 4 January 2011. This had been widely predicted before the Budget. No taxes will be imposed on items that are currently zero-rated (e.g. food, children's clothes).
A new bank levy was announced, to raise £2 billion p.a. Corporation Tax will fall progressively in 1% increments for each of the next four years, from 28% to 24%. The small companies' tax rate will be cut from 21% to 20%.
Capital Gains Tax
increases from 18% to 28% from the following day, for higher rate taxpayers only.
There were no changes to duties on fuel (petrol and diesel), alcohol, and tobacco
. Osborne cancelled the increase that Labour had planned
on cider.
Spending
Osborne announced further reductions in public expenditure to reach £17 billion by 2014/15. The Budget did not make any further reductions in overall capital expenditure
, but projects will be prioritised and reassessed in the autumn spending review
.
Public sector
workers face a two-year pay freeze, although 1.7 million of those earning less than £21,000 will get a flat pay-rise worth £250 in both years.
The government will accelerate the increase in state pension age to 66.
From 2011, state benefits other than the state pension and pension credit will be pegged to consumer prices
rather than retail prices. The same will apply to public service pensions. These measures were expected to reduce public spending by over £6 billion p.a. within the five-year term of the Parliament.
Child benefit
was frozen for three years. Tax credits will provide an additional £150 a year for the poorest families, but with withdrawal rates increased by 2% to 41%, reducing tax credits at higher incomes.
Housing Benefit
reforms will introduce a maximum payment of £400 per week. This would save £1.8bn p.a.
A new medical assessment for Disability Living Allowance
will be introduced from 2013.
Heavy Industrial Plant Grants will rise from 10% to 11% of the purchase price for small business.
The Queen's Civil List
payment remains frozen at £7.9 million.
The government's top priority is to reduce government borrowing from its peacetime record highs. Prime Minister David Cameron
said the previous Labour government had refused to publish its own projections showing the escalating cost of interest. He argued that taxes should be spent on public services rather than paying interest on the national debt.
The changes to the UK Budget were expected to focus on cuts to government spending
rather than increases in taxation
. The Chancellor stated early on that health and international aid
expenditure would be protected. On 24 May, he then outlined £6.2 billion of spending cuts.
The coalition agreement included an intention to reduce child tax credit
s and Child Trust Fund
s for better-off families.
The parties had agreed to raise the rate of capital gains tax
(CGT) to match individuals' highest rates of income tax, excluding gains on business investments, and to reduce the rise in employers' National Insurance
contributions which Labour had planned. The Conservatives had also agreed to Liberal Democrat wishes to gradually raise the personal allowance
, i.e. the level of income on which no tax
is paid.
Tory statements before the election also pointed to a reduction in corporation tax, perhaps partly paid for by changes to capital allowances which are currently seen as complex.
The Business Secretary, Liberal Democrat Vince Cable, had announced that reducing tax avoidance
is a priority of the new government.
The coalition agreement did not resolve all areas of differences between the two parties' tax policies, and tax advisers were complaining of uncertainty ahead of the budget. The Liberal Democrats had wanted to reduce the annual exemption from CGT, and to cap the rate of relief for pension contributions. John Redwood
and David Davis
publicly argued against the rise in the CGT rate, but Cable insisted that the parties were not divided over the issue.
responded for the opposition, calling the speech a "Tory budget", and predicting that it would increase unemployment and stifle growth.
Some Liberal Democrats were disappointed that capital gains tax
(CGT) remained lower than the rates of income tax. Meanwhile, the British Venture Capital Association expressed entrepreneurs' "deep concern" over the CGT hike, warning that it could deter overseas investors. The immediate implementation date for the rise surprised tax advisers.
However, former Bank of England rate setter David Blanchflower
warned that the budget risked sending the UK into another recession, and that a "double-dip" is now the best case scenario, and Nobel Prize-winning economist Paul Krugman
called the budget cuts "crazy".
The Minister for Women and Equalities, Theresa May
, had written to the Chancellor emphasising the need to assess the effect of the budget on women, disabled people and ethnic minorities. the Fawcett Society
is seeking a judicial review
of the emergency budget for failing to demonstrate that such an assessment had been made. The High Court refused to grant permission for such a review in December 2010.
George Osborne
George Gideon Oliver Osborne, MP is a British Conservative politician. He is the Chancellor of the Exchequer of the United Kingdom, a role to which he was appointed in May 2010, and has been the Member of Parliament for Tatton since 2001.Osborne is part of the old Anglo-Irish aristocracy, known in...
, Chancellor of the Exchequer
Chancellor of the Exchequer
The Chancellor of the Exchequer is the title held by the British Cabinet minister who is responsible for all economic and financial matters. Often simply called the Chancellor, the office-holder controls HM Treasury and plays a role akin to the posts of Minister of Finance or Secretary of the...
, to the House of Commons in his budget speech that commenced at about 12.30 p.m on Tuesday 22 June 2010 (just 90 days after the previous budget speech
March 2010 United Kingdom Budget
The March 2010 United Kingdom Budget, official known as Budget 2010: Securing the recovery, was delivered by Alistair Darling, Chancellor of the Exchequer, to the House of Commons on 24 March 2010....
). It was the first budget
United Kingdom budget
The United Kingdom budget deals with HM Treasury budgeting the revenues gathered by Her Majesty's Revenue and Customs and expenditures of public sector departments, in compliance with government policy.Adjustment is achieved with the GDP deflator....
of the Conservative-Liberal Democrat coalition formed after the general election of May 2010. The government dubbed it an "emergency budget", and stated that its purpose was to reduce the national debt accumulated under the Labour government.
In his budget speech Osborne quoted data and forecasts made by the independent Office for Budget Responsibility
Office for Budget Responsibility
The Office for Budget Responsibility provides independent economic forecasts as background to the preparation of the UK budget. It was formally created in May 2010 following the general election, although it had previously been constituted in shadow form by the Conservative party opposition in...
that was formed by the coalition soon after they took up office.
The preceding budget
March 2010 United Kingdom Budget
The March 2010 United Kingdom Budget, official known as Budget 2010: Securing the recovery, was delivered by Alistair Darling, Chancellor of the Exchequer, to the House of Commons on 24 March 2010....
of the Labour Party
Labour Party (UK)
The Labour Party is a centre-left democratic socialist party in the United Kingdom. It surpassed the Liberal Party in general elections during the early 1920s, forming minority governments under Ramsay MacDonald in 1924 and 1929-1931. The party was in a wartime coalition from 1940 to 1945, after...
in March was only partly enacted due to the calling of the election.
Economy
Osborne predicted that the economy would grow by 1.2% in 2010, rising to 2.9% in 2013.He said the country was set to miss the previous government's "golden rule
Golden Rule (fiscal policy)
The Golden Rule is a guideline for the operation of fiscal policy. The Golden Rule states that over the economic cycle, the Government will borrow only to invest and not to fund current spending. In layman's terms this means that on average over the ups and downs of an economic cycle the government...
" in the current cycle by £
Pound sterling
The pound sterling , commonly called the pound, is the official currency of the United Kingdom, its Crown Dependencies and the British Overseas Territories of South Georgia and the South Sandwich Islands, British Antarctic Territory and Tristan da Cunha. It is subdivided into 100 pence...
485bn.
The Chancellor said he expected consumer price inflation (as measured by the Consumer Price Index
Consumer Price Index (United Kingdom)
The Consumer Price Index is the official measure of inflation of consumer prices of the United Kingdom. It is also called the Harmonised Index of Consumer Prices .-History:...
) to reach 2.7% in 2010, above the target of 2%.
He forecast that unemployment would peak at 8.1% in 2010, falling over each of the next four years.
Osborne said the state accounted for "almost half" of all national income, including the escalating cost of debt interest, which was "completely unsustainable".
Measures introduced
Osborne aimed to balance the structural current accountCurrent account
In economics, the current account is one of the two primary components of the balance of payments, the other being the capital account. The current account is the sum of the balance of trade , net factor income and net transfer payments .The current account balance is one of two major...
deficit by 2015–16. The balance of tax rises to spending cuts in his budget was 23% to 77%.
Taxes
Income tax personal allowance
Personal allowance
In the UK tax system, Personal Allowance is the level above which income tax is levied on an individual's annual income. A person who receives less than his/her personal allowance in taxable income in a given tax year does not pay income tax; otherwise, tax must be paid according to how much is...
s for people under 65 years old will be raised by £1000 from April 2011, taking about 880,000 people out of the tax system and reducing income tax
Income tax
An income tax is a tax levied on the income of individuals or businesses . Various income tax systems exist, with varying degrees of tax incidence. Income taxation can be progressive, proportional, or regressive. When the tax is levied on the income of companies, it is often called a corporate...
on the low-paid by £200 p.a.
The main rate of VAT
Value added tax
A value added tax or value-added tax is a form of consumption tax. From the perspective of the buyer, it is a tax on the purchase price. From that of the seller, it is a tax only on the "value added" to a product, material or service, from an accounting point of view, by this stage of its...
will increase from 17.5% to 20% on 4 January 2011. This had been widely predicted before the Budget. No taxes will be imposed on items that are currently zero-rated (e.g. food, children's clothes).
A new bank levy was announced, to raise £2 billion p.a. Corporation Tax will fall progressively in 1% increments for each of the next four years, from 28% to 24%. The small companies' tax rate will be cut from 21% to 20%.
Capital Gains Tax
Capital gains tax
A capital gains tax is a tax charged on capital gains, the profit realized on the sale of a non-inventory asset that was purchased at a lower price. The most common capital gains are realized from the sale of stocks, bonds, precious metals and property...
increases from 18% to 28% from the following day, for higher rate taxpayers only.
There were no changes to duties on fuel (petrol and diesel), alcohol, and tobacco
Tobacco
Tobacco is an agricultural product processed from the leaves of plants in the genus Nicotiana. It can be consumed, used as a pesticide and, in the form of nicotine tartrate, used in some medicines...
. Osborne cancelled the increase that Labour had planned
March 2010 United Kingdom Budget
The March 2010 United Kingdom Budget, official known as Budget 2010: Securing the recovery, was delivered by Alistair Darling, Chancellor of the Exchequer, to the House of Commons on 24 March 2010....
on cider.
Spending
Osborne announced further reductions in public expenditure to reach £17 billion by 2014/15. The Budget did not make any further reductions in overall capital expenditure
Capital expenditure
Capital expenditures are expenditures creating future benefits. A capital expenditure is incurred when a business spends money either to buy fixed assets or to add to the value of an existing fixed asset with a useful life extending beyond the taxable year...
, but projects will be prioritised and reassessed in the autumn spending review
Spending Review (United Kingdom)
A Spending Review or occasionally Comprehensive Spending Review is a governmental process in the United Kingdom carried out by HM Treasury to set firm aditure limits and, through public service agreements, define the key improvements that the public can expect from these resources.Spending Reviews...
.
Public sector
Public sector
The public sector, sometimes referred to as the state sector, is a part of the state that deals with either the production, delivery and allocation of goods and services by and for the government or its citizens, whether national, regional or local/municipal.Examples of public sector activity range...
workers face a two-year pay freeze, although 1.7 million of those earning less than £21,000 will get a flat pay-rise worth £250 in both years.
The government will accelerate the increase in state pension age to 66.
From 2011, state benefits other than the state pension and pension credit will be pegged to consumer prices
Consumer price index
A consumer price index measures changes in the price level of consumer goods and services purchased by households. The CPI, in the United States is defined by the Bureau of Labor Statistics as "a measure of the average change over time in the prices paid by urban consumers for a market basket of...
rather than retail prices. The same will apply to public service pensions. These measures were expected to reduce public spending by over £6 billion p.a. within the five-year term of the Parliament.
Child benefit
Child benefit
Child benefit is a social security payment disbursed to the parents or guardians of children. Child benefit is means-tested in some countries.-Australia:...
was frozen for three years. Tax credits will provide an additional £150 a year for the poorest families, but with withdrawal rates increased by 2% to 41%, reducing tax credits at higher incomes.
Housing Benefit
Housing Benefit
Housing Benefit is a means tested social security benefit in the UK that is intended to help meet Housing costs for rented accommodation. The primary legislation governing Housing Benefit is the Social Security Contributions and Benefits Act 1992. Operationally, the governing Regulations are...
reforms will introduce a maximum payment of £400 per week. This would save £1.8bn p.a.
A new medical assessment for Disability Living Allowance
Disability Living Allowance
Disability living allowance is a non-means-tested, non-contributory benefit which can be claimed by a UK resident aged under 65 years who has care and/or mobility needs as a result of a mental or physical disability...
will be introduced from 2013.
Heavy Industrial Plant Grants will rise from 10% to 11% of the purchase price for small business.
The Queen's Civil List
Civil list
-United Kingdom:In the United Kingdom, the Civil List is the name given to the annual grant that covers some expenses associated with the Sovereign performing their official duties, including those for staff salaries, State Visits, public engagements, ceremonial functions and the upkeep of the...
payment remains frozen at £7.9 million.
Prior announcements and discussions
In the light of the change in ruling party, the recession, the novelty of coalition government and the strain which the painful decisions would put on the coalition, this Budget generated a high degree of public interest and discussion in advance.The government's top priority is to reduce government borrowing from its peacetime record highs. Prime Minister David Cameron
David Cameron
David William Donald Cameron is the current Prime Minister of the United Kingdom, First Lord of the Treasury, Minister for the Civil Service and Leader of the Conservative Party. Cameron represents Witney as its Member of Parliament ....
said the previous Labour government had refused to publish its own projections showing the escalating cost of interest. He argued that taxes should be spent on public services rather than paying interest on the national debt.
The changes to the UK Budget were expected to focus on cuts to government spending
Government spending
Government spending includes all government consumption, investment but excludes transfer payments made by a state. Government acquisition of goods and services for current use to directly satisfy individual or collective needs of the members of the community is classed as government final...
rather than increases in taxation
Taxation in the United Kingdom
Taxation in the United Kingdom may involve payments to a minimum of two different levels of government: The central government and local government. Central government revenues come primarily from income tax, National Insurance contributions, value added tax, corporation tax and fuel duty...
. The Chancellor stated early on that health and international aid
Department for International Development
The Department For International Development is a United Kingdom government department with a Cabinet Minister in charge. It was separated from the Foreign and Commonwealth Office in 1997. The goal of the department is "to promote sustainable development and eliminate world poverty". The current...
expenditure would be protected. On 24 May, he then outlined £6.2 billion of spending cuts.
The coalition agreement included an intention to reduce child tax credit
Child tax credit
A child tax credit is the name for tax credits issued in some countries that depends on the number of dependent children in a family. The credit may depend on other factors as well: typically it depends on income level. For example, in the United States, only families making less than $110K per...
s and Child Trust Fund
Child Trust Fund
A Child Trust Fund is a long-term savings or investment account for children in the United Kingdom. New accounts cannot be created but existing accounts can receive new money...
s for better-off families.
The parties had agreed to raise the rate of capital gains tax
Capital gains tax
A capital gains tax is a tax charged on capital gains, the profit realized on the sale of a non-inventory asset that was purchased at a lower price. The most common capital gains are realized from the sale of stocks, bonds, precious metals and property...
(CGT) to match individuals' highest rates of income tax, excluding gains on business investments, and to reduce the rise in employers' National Insurance
National Insurance
National Insurance in the United Kingdom was initially a contributory system of insurance against illness and unemployment, and later also provided retirement pensions and other benefits...
contributions which Labour had planned. The Conservatives had also agreed to Liberal Democrat wishes to gradually raise the personal allowance
Personal allowance
In the UK tax system, Personal Allowance is the level above which income tax is levied on an individual's annual income. A person who receives less than his/her personal allowance in taxable income in a given tax year does not pay income tax; otherwise, tax must be paid according to how much is...
, i.e. the level of income on which no tax
Income tax
An income tax is a tax levied on the income of individuals or businesses . Various income tax systems exist, with varying degrees of tax incidence. Income taxation can be progressive, proportional, or regressive. When the tax is levied on the income of companies, it is often called a corporate...
is paid.
Tory statements before the election also pointed to a reduction in corporation tax, perhaps partly paid for by changes to capital allowances which are currently seen as complex.
The Business Secretary, Liberal Democrat Vince Cable, had announced that reducing tax avoidance
Tax avoidance
Tax avoidance is the legal utilization of the tax regime to one's own advantage, to reduce the amount of tax that is payable by means that are within the law. The term tax mitigation is a synonym for tax avoidance. Its original use was by tax advisors as an alternative to the pejorative term tax...
is a priority of the new government.
The coalition agreement did not resolve all areas of differences between the two parties' tax policies, and tax advisers were complaining of uncertainty ahead of the budget. The Liberal Democrats had wanted to reduce the annual exemption from CGT, and to cap the rate of relief for pension contributions. John Redwood
John Redwood
John Alan Redwood is a British Conservative Party politician and Member of Parliament for Wokingham. He was formerly Secretary of State for Wales in Prime Minister John Major's Cabinet and was an unsuccessful challenger for the leadership of the Conservative Party in 1995...
and David Davis
David Davis (British politician)
David Michael Davis is a British Conservative Party politician who is the Member of Parliament for the constituency of Haltemprice and Howden...
publicly argued against the rise in the CGT rate, but Cable insisted that the parties were not divided over the issue.
Reactions after the Budget speech
Acting Labour leader Harriet HarmanHarriet Harman
Harriet Ruth Harman QC is a British Labour Party politician, who is the Member of Parliament for Camberwell and Peckham, and was MP for the predecessorPeckham constituency from 1982 to 1997...
responded for the opposition, calling the speech a "Tory budget", and predicting that it would increase unemployment and stifle growth.
Some Liberal Democrats were disappointed that capital gains tax
Capital gains tax
A capital gains tax is a tax charged on capital gains, the profit realized on the sale of a non-inventory asset that was purchased at a lower price. The most common capital gains are realized from the sale of stocks, bonds, precious metals and property...
(CGT) remained lower than the rates of income tax. Meanwhile, the British Venture Capital Association expressed entrepreneurs' "deep concern" over the CGT hike, warning that it could deter overseas investors. The immediate implementation date for the rise surprised tax advisers.
However, former Bank of England rate setter David Blanchflower
David Blanchflower
David Graham Blanchflower CBE is a leading labour economist, currently a tenured economics professor at Dartmouth College, Hanover, New Hampshire...
warned that the budget risked sending the UK into another recession, and that a "double-dip" is now the best case scenario, and Nobel Prize-winning economist Paul Krugman
Paul Krugman
Paul Robin Krugman is an American economist, professor of Economics and International Affairs at the Woodrow Wilson School of Public and International Affairs at Princeton University, Centenary Professor at the London School of Economics, and an op-ed columnist for The New York Times...
called the budget cuts "crazy".
The Minister for Women and Equalities, Theresa May
Theresa May
Theresa Mary May is a British Conservative politician who is Home Secretary in the Conservative – Liberal Democrat Coalition government. She was elected to Parliament in 1997 as the Member of Parliament for Maidenhead, and served as the Chairman of the Conservative Party, 2003–04...
, had written to the Chancellor emphasising the need to assess the effect of the budget on women, disabled people and ethnic minorities. the Fawcett Society
Fawcett Society
The Fawcett Society is an organisation in the United Kingdom which campaigns for women's rights. The organisation's roots date back to 1866 when Millicent Garrett Fawcett dedicated her life to the peaceful campaign for women's suffrage....
is seeking a judicial review
Judicial review
Judicial review is the doctrine under which legislative and executive actions are subject to review by the judiciary. Specific courts with judicial review power must annul the acts of the state when it finds them incompatible with a higher authority...
of the emergency budget for failing to demonstrate that such an assessment had been made. The High Court refused to grant permission for such a review in December 2010.
See also
- Financial crisis of 2007–2010
- United Kingdom coalition government 2010 to present
External links
(2.8MB download)- Budget glossary, The Guardian, 22 June 2010
- Finance Bill 2010-11