A Snapshot of Budget 2011 – Talking Points

Yesterday’s budget delivered by George Osborne’s budget will best be judged by how the economy performs in the coming quarters. Faced with a daunting fiscal challenge, the UK Chancellor has turned his attention to the factors that will shape the growth of the economy in the future. His main emphasis for growth is through retaining foreign businesses in UK, facilitating growth of businesses and bringing more foreign investments. The following will be the major talking points in the coming weeks.

Corporation Tax

The most welcomed measure is his pledge to cut corporation tax by 2% in April double the previously planned reduction and then lower the tax to 23 percent by 2014. That should discourage companies from shifting their operations elsewhere and may even prompt more foreign investments here in the UK.

Business in general

Chancellor’s strategy is to make companies and investors, in the UK and elsewhere, to perceive Britain as a worthy place to do business. He also wants to shift from what he called the “debt-fuelled” expansion of the past, to growth based on enterprise, innovation, design, manufacturing and exports within UK. Other smart moves include a proposal to end the UK’s absurd duplication of income tax with National Insurance, and a plan to automatically link the retirement age to increasing longevity. Highly paid workers will also welcome Osborne’s pledge that the 50 pence top rate of income tax is temporary even though it will not be scrapped just yet.

Enterprise zones

An innovative measure introduced by the Chancellor yesterday was creating 21 enterprise zones. These zones, which offer reduced taxes and services such as high-speed broadband, rail links etc. The aim is to help stimulate businesses in deprived areas.

Personal allowance

Chancellor made further progress in increasing personal tax allowances, taking more low paid people entirely out of the tax system. That is a good and equitable idea and helps economic growth. The personal allowance from April onwards will be increased by £1000.00 to £7475.00 and by another £630.00 to £8105.00 by 2012.

Fuel duty reduction and raid on North Sea Oil Companies

The most popular out of all the policy measures outlined yesterday was the reduction in fuel duty by 1p from 18.00 GMT yesterday. Though it can be seen as an encouraging measure in case of small and medium businesses, sceptics would argue that this is not adequate to halt the rising cost of living of the ordinary people. Furthermore, planned inflation rise in fuel duty due in April is also delayed until 2012 and annual 1p above inflation “fuel escalator” rise is scrapped until 2015.

In order to compensate for these measures, Osborne intends on a windfall tax on North Sea Oil companies amounting to £1 billion. This was termed as “totally unexpected” by the oil bosses last night and is likely to have severe repercussions on jobs of those companies.

Growth forecast and inflation

The growth forecast of the UK economy has been downgraded from 2.1% to 1.7%. while for 2012 it has been downgraded from 2.6% to 2.5%. This is seen as a severe blow to the viability of the government’s actions so far and planned policy initiatives for the future. The inflation is set to remain between 4% to 5% in 2011 and falling to 2.5% in 2012.

Borrowings and national debt

Even though, the conservatives were heavily against borrowings, the rate of borrowing doesn’t seem to be coming down as fast as they expected.  Forecasted borrowings for 2011 are £146bn, which is £2.5bn lower than anticipated. Next year the borrowings are expected to fall to £122bn dropping to £29bn by 2015-16. National debt forecast to be 60% of national income this year, rising to 71% in 2012 before falling to 69% by 2015

Other forms of taxes

It will be a sigh of relief for those who live in England, as council tax will be frozen in every English council. Furthermore, there’s a tax discount of 10% on inheritance tax for those who provide their estates for charitable purposes. Rise in air passenger duty will be frozen this year, but on the other hand private jet users will be required to pay the passenger duty for the first time.

Jobs and skills

The Chancellor seems to have opted for a new approach in higher education whereby, more support and resources are deployed to open up new technical colleges and to fund apprenticeships. He plans to fund 12 further university technical colleges and at the same time provide extra 40,000 apprenticeships for young people out of work. Also a point worthwhile noting is the funding for 100,000 new work experience placements.

Going green

The environmental sustainability has not all been forgotten it seems. An investment worth £2bn extra funding for a Green Investment Bank has been proposed to champion Britain’s commitment for green energy exploration. This is expected to be launched in 2012. Further to this, a plan for UK to introduce a carbon price floor for the power sector was outlined.

Conclusions

The budget has some positive points to talk about such as the reduction in corporation tax fuel duty and the increase in personal allowance. Nevertheless, this budget won’t change the picture much in that regard. Chancellor’s broader goal of reducing the fiscal deficit means the government will continue to withdraw funds from the economy by wielding the axe on benefits. The big worry is that growth still is at a disappointing level. The benefits from today’s supply side measures will take years to come through. In the meantime, the UK still faces a lot of pain.

 

Source: bbc.co.uk and uk.reuters.com

Go to the following links to read more on where the axe has fallen

http://www.bbc.co.uk/news/uk-politics-12829433

Get to the bottom of it. The Budget 2011; Full Report from HM Treasury

http://cdn.hm-treasury.gov.uk/2011budget_complete.pdf

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