Budget 2011

Chancellor nails his colours to the mast George Osborne’s second Budget focused on measures to boost entrepreneurship and support businesses in the UK but he had less welcome news for the country’s banks and oil and gas companies

Delivering his second Budget in less than a year, Chancellor of the Exchequer George Osborne admitted economic growth in the UK is likely to be somewhat weaker than expected. Nevertheless, he described his Budget as being “for growth”. He focused on measures to boost entrepreneurship and support businesses in the UK, although these measures were accompanied by an increased levy on UK banks and a surprise windfall tax on North Sea oil and gas companies.

Fuel in the tank
In order to alleviate the effects of soaring petrol prices, the Chancellor announced the rise in fuel duty – originally scheduled for April 2011 – will be delayed until 2012. Fuel duty is to be cut by a further 1p per litre and the annual “fuel escalator” rise of 1p above inflation has been cancelled until 2015.

Osborne also introduced a fuel price stabiliser to control the cost of fuel at the pumps. These measures will be financed by an additional tax on North Sea oil companies of £2bn per year. This news was not well received by industry body Oil & Gas UK, which warned the levy might increase the UK’s dependence on imported oil and gas.

Giving with one hand? …
The personal tax allowance for individuals was increased by £630 to £8,105 from April 2012, a measure that will also benefit those paying the higher 40% tax rate. However, pensioners will not benefit from any increase in allowance. The top tax rate of 50% remains intact for now, although Osborne warned it would cause “lasting damage to our economy if it were to become permanent.”

Last year, the Chancellor announced tax credits, benefits and public service pensions would cease to increase in line with the Retail Price Index and would instead increase in line with the lower Consumer Prices Index (CPI). Thresholds for direct taxes will now follow suit, increasing in line with CPI, and this change will mean many people will have to pay a higher rate of tax in future.

The Chancellor also announced a consultation about possible measures to merge income tax and National Insurance – a move that would ultimately increase transparency. Elsewhere, 10,000 first-time buyers are to be helped onto the housing ladder and given assistance to buy newly built properties.

Open for business
As part of his drive to ensure Britain is “open for business”, the Chancellor increased this year’s planned 1% cut in corporation tax to 2%. The rate of corporation tax will be reduced by 1% every year over the next three years, bringing it down to 23%. However, the levy on banks will be adjusted to ensure they do not benefit from the reduced corporation tax. Excessive red tape will be removed to help businesses, and 21 new “enterprise zones” are to be created.

Reduced expectations for UK economic growth
The Office for Budget Responsibility believes the measures contained in the Budget are unlikely to have any material impact on the UK’s long-term potential for growth. The Chancellor was forced to downgrade expectations for UK economic expansion, announcing a cut in the government’s growth forecasts from 2.1% to 1.7% in 2011, and from 2.6% to 2.5% in 2012. Inflation is expected to remain high – at between 4% and 5% – during 2011, but is forecast to decline to 2.5% during 2012.

Borrowing lower than expected in 2011
The forecast for government borrowing to fund the UK’s budget deficit during 2011 was reduced by £2.5bn to £146bn. Borrowing is expected to decline to £122bn during 2012, and eventually to fall to £29bn by 2015/16. National debt as a share of national income is expected to total 60% in 2011, peaking at 71% during 2012, and then subsiding to 69% by 2015.

Fiscally neutral
The Confederation of British Industry gave a cautious welcome to most of the measures, commenting: “This Budget will help businesses grow and create jobs.” Nevertheless, the CBI expressed some disquiet about the windfall tax on North Sea oil companies, warning it creates uncertainty for future investment.

Osborne described the measures as “fiscally neutral”, adding it was “not a tax-raising budget, but nor can we afford a giveaway”. He remains inhibited by the UK’s massive budget deficit, and is further constrained by the sluggish economy and the need to implement the raft of harsh spending cuts announced last year.

Notwithstanding the increased income tax allowances, any gains to households are likely to be more than offset by the effects of higher VAT, taxes and National Insurance contributions and reduced benefits. Nevertheless, the Chancellor shrugged off any anticipated criticism, stating, “Britain has a plan … and we’re sticking to it.”

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