A fair Budget with protection for the poorest

In a bold first Budget, chancellor George Osborne made his mark with major reforms, sweeping away much of the benefit dependency culture and changing the social landscape of both taxation and benefits. 

Wealthier families who have been able to claim Child Tax Credits, payable to parents with incomes of up to £58,000, will suffer benefit cuts while nearly a million on lower incomes will be taken out of the tax net altogether as the personal tax allowance is raised £7,475 from next April, an increase of £1,000 worth £200 a year to a basic rate tax payer.

During his time as chancellor, Gordon Brown had gone to great lengths to make us all ‘clients of the State’ with the introduction of tax credits for families with incomes well over the national average of around £25,000 a year - in the hope that we would vote to keep him in office.  Most of this is being swept away with the income level for eligibility for tax credits cut to £40,000 a year and an estimated two million families will lose benefits.  These are worth as much as £545 a year for a family with two children and an income of £50,000 a year.  The earnings disregard will also be reduced from its current level of £25,000 to £10,000 a year.  But there will be an increase in the child element of tax credit for those on the lowest incomes.

Osborne is very keen to be seen to be fair so there is belt tightening across the board.  Everyone will pay more for goods and services as a result of the increase in VAT to 20% which takes effect from January 4^th 2011.  This raises over £1 billion a month or around £13 billion a year – a significant contribution to reducing the government’s deficit of £155 billion.   But there was a sigh of relief as the tax net was not widened to include food - the biggest single item of expenditure after housing costs for low income families.  To a large extent VAT is a voluntary tax – if you don’t spend on goods and services, you don’t pay it, so many ordinary families will escape this higher tax.

As expected, Capital Gains Tax is increased from midnight tonight to a flat rate of 28% - but only for those paying higher rates of income tax. Basic rate taxpayers will continue to be liable at the existing rate of 18%.  There are concessions for entrepreneurs who will be able realise the first £5 million of gains at a flat rate of 10% compared with the current threshold of £2 million.  The tax net has not been widened and the Chancellor confirmed that the annual exemption of £10,100 (2010-11) will remain in place so those who benefit from Save as You Earn will not be penalised.   The losers are those intended to suffer – the hedge fund and private equity managers who pay themselves in profits which until today were taxed at just 18%.  Now they will have to pay tax at 28% on their profits.

Child Trust Funds have been abolished and Child Benefit, the universal tax free benefit paid to all parents at a rate of £20.30 a week for the first child and £13.40 a week for subsequent children is to be frozen for the next three years.   Child Benefit was introduced in 1977 by a Labour government and official statistics show that some 7.5 million families receive Child Benefit in respect of 13 million children at an annual cost to the Exchequer of over £7 billion a year and rising.  Until now annual increases were index-linked.  

There will also be tougher medical tests for those claiming disability benefits and a reduction of £1.8 billion a year in housing benefit with the upper limits for claims for rent payments substantially reduced. 

Pensioners will welcome the announcement that State pensions will be linked to the higher of earnings, prices (as measured by the CPI rather than the RPI) or 2.5% from next year.  And there will be incentives for local authorities which will allow them to bring in a freeze in Council Tax, worth an average of £35 per family, from next year.

Higher paid public sector workers will suffer with a two year pay freeze but this will be mitigated for lower earners on salaries of £21,000 a year or less who will get a £250 flat pay rise.  There will also be a wide ranging review of both pay and pension in the public sector. 

Overall, Osborne has met his requirement to raise substantial sums in extra tax, and cuts in benefits, but in the fairest possible way with the costs being carried mostly by those who can afford to pay.