Budget 2010 - painful but necessary

So we now know following George Osborne's first budget today what measures are going to be taken over the next few years to get the deficit under control.

I have picked out some of the main points along with my thoughts below:

• VAT up to 20%. As I have repeatedly stated on here I would have preferred income tax to go up rather than VAT as at least that is clear and based on ability to pay. VAT is a stealth tax and by some measures is regressive. But governments hate putting up income tax (because the public hates it whatever they might say to pollsters, punishes politicians that do it and we do live in a democracy). The £13 billion it raises is necessary unless the cuts were to go even deeper which would surely have been politically impossible and caused even greater howls from the opposition.
• Income tax allowance threshold to increase by £1,000. I am very much in favour of this and it moves us towards the Lib Dem policy of having everyone who earns under £10,000 taken out of income tax altogether. I have had arguments with numerous left wingers on Twitter about this who keep saying that it does nothing to help the poorest in society. I know. It's not designed to. It's an income tax measure and the poorest in society do not pay income tax. What it does do it allow the lowest earners to keep more of their own money which I see as a very good thing.
• Capital Gains tax threshold up to 28% for higher rate tax payers, kept at 18% for lower rate tax payers. I would have preferred to see this go closer to 40% to completely close the gap with the higher rate of tax but I understand that this is a compromise.
• Corporation tax for large companies to come down from 28% to 24% in 1% decrements over the next 4 years. Corporation tax for small companies to come down from 21% to 20% next year with no further reductions scheduled. First, declaration of interest, I own and run a small business. Whilst I am pleased to see corporation tax coming down (this will encourage growth which will help us get out of the fiscal problems faster) I think the balance should have been reversed with the small companies rate coming down more quickly. This is not from a self-motivated perspective but because small companies are the engine of the economy and the less tax they pay, the more likely they are to grow and ultimately also become the large companies that pay the higher tax ultimately anyway.
• Levy of £2 billion on banks. I would have liked this to be higher.
• Accelerating the change in retirement age to 66. A necessary move. The sooner politicians are honest about this the better. We cannot continue to subsidise retirements of 20 or more years as the norm. Pensions were never intended to do this and the next generation cannot afford to do it.
• Child benefit frozen for 3 years. I would much rather have seen it means tested although some say it would have been expensive to administer this. I am not convinced this would make it unworkable though. I expect Labour to go for the government's throat on this and it is harder to justify than means testing.
• Tax credits reduced for families earning over £40K per year. I have no problem with this. The money needs to come from somewhere and this is one example of where those earning a bit more have to contribute.

There are lots of other measures but I think these are the main ones. Overall it is not a nice budget and there is lots of pain. However I totally agree with Osborne's comments that the government has been forced into this position. I think Harriet Harman actually made a good impassioned contribution from the dispatch box in response in terms of performance but there is no narrative from Labour about what they would have cut differently. They just seem to oppose everything and as a result lack credibility. They should also display more humility about why we are in this situation in the first place.

At the end of his statement, Osborne claimed that the Treasury has analysed the changes and calculated that the poorest are least affected and the richest most affected. I expect to see lots of alternative analysis from left wing blogs in the next few days telling us why they think this is wrong.

I think however that particular argument goes, the pain is necessary to get our finances back on track. Hopefully as the economy grows in the next few years some of the pain can be mitgated.

Budget day Live Chat

From 12:00 noon today I am participating in a Budget Live Chat coordinated by Left Foot Forward across a number of other blogs.

You can join us from 12:00 noon below, budget itself starts at 12:30pm:

Raising the income tax threshold - great news!

According to reports, George Osborne is likely to raise the threshold at which people start to pay income by £1000 to £7,475. This is apparently to be paid for by clawing it back from top-rate taxpayers. I am am not clear on exactly how this second part will work but if this is correct then I think it is excellent news.

Firstly it is the beginning of an implementation of the Lib Dem policy to take everyone earning less than £10,000 per year out of income tax. It gets us over a quarter of the way to realising this aim. It is also something I think we can genuinely point at at say that it is unlikely to have happened had we not been in the government.

Secondly it will offset the likely rise in VAT to 20% for the poorest earning families. If a 2.5% hike in VAT is going to cost the average family £389 ((c) 2010 Lib Dem election campaign) then surely it will cost the average lower earning families proportionally less. I do not have the exact figures but I would expect it will be a net gain to those earning the lowest amounts.

Don't get me wrong, I still don't think raising VAT is the right move but at least its effect will be mitigated for some of the most vulnerable.

Of course we hit the problem of what happens to those who do not earn anything at all but I await to see what is in the budget overall before passing comment on that.

So will Darling cut petrol duty next week?

There are reports this morning that the AA thinks petrol prices could reach an all time high of £1.20 per litre in the next few weeks. As Mike Smithson points out this morning, many people in the marginals are particularly sensitive to fuel prices.

There is a 3 pence rise in fuel duty due to come in on 1st April. The fact that Gordon Brown has pushed the election so late means that these budget chickens are starting to come home to roost. The AA has urged the Chancellor to delay this increase and I expect he will do.

However I wonder if Darling will go further and actually cut fuel duty in next week's budget. He could dress it up as a temporary measure due to the very high price of fuel and the economic situation. I bet if Ed Balls was Chancellor he would do it. Darling seems to be more circumspect though and may well dismiss such an idea as a populist gimmick.

Of course the downside is that it would damage the government's green credentials but they may consider this a price worth paying.

It will be interesting to see what if anything Darling does about this.