UK Emergency Budget

Budget: Osborne's 'tough' package puts VAT up to 20%
Page last updated at 14:02 GMT, Tuesday, 22 June 2010 15:02 UK
E-mail this to a friend Printable version Osborne: "The years of debt and spending made this unavoidable"
VAT is to rise from 17.5% to 20% in January after George Osborne unveiled the biggest package of tax increases and spending cuts in a generation.

He said his "tough but fair" Budget was "unavoidable" although he told MPs in the Commons there would be no extra tax on alcohol, tobacco and fuel.

Child benefit will be frozen for three years and there would be cuts to family tax credits and housing benefits.

Labour said the Budget was "wreckless" and would "throw people out of work".

Acting Labour leader Harriet Harman said it would stifle growth and hit hardest "those who can least afford it".

But Mr Osborne laid the blame for the state of the nation's finances squarely at the door of the previous Labour government, saying: "The years of debt and spending make this unavoidable."

'Progressive budget'

He promised to balance Britain's books within five years - faster than Labour was planning, with the bulk of the savings to come from cuts to benefits and public services rather than tax increases.

He said action was needed to prevent a "catastrophic collapse" in economic confidence but stressed it would be done in a "fair" way with the better-off shouldering most of the burden.

BUDGET MEASURES
Continue reading the main story VAT increase
Public sector pay freeze
Child benefit frozen
Housing benefit cuts
Disability Living Allowance cuts
Tax cut for lowest paid
Two year council tax freeze
Capital Gains Tax increased
Bank levy
NI tax holiday for job creation outside South-East of England
Key points: At-a-glance

Harman attacks 'reckless' Budget

How the VAT rise will work
UK to 'balance books' by 2016
"Everyone will pay something but the people at the bottom of the income scale will pay proportionately less than those at the top. This is a progressive Budget," he said to jeers from Labour MPs.

Tax credits will be cut for families earning more than £40,000 a year - and there will be a two year pay freeze for public servants paid more than £21,000, with those earning less all getting a £250 rise.

In addition to the VAT increase, which Mr Osborne said would raise £13bn a year, capital gains tax will be increased to 28% for top rate taxpayers - less than the 50% some Conservative backbenchers had feared.

And he ended his speech with a pledge to link pensions to earnings - or prices or 2.5% if they are higher.

He also signalled that public spending cuts would be much deeper than previously expected.

All government departments are facing real terms cuts of 25% over four years, except health and foreign aid, which have been ringfenced.

The full detail will not be revealed until Wednesday 20 October, when Mr Osborne publishes his spending review.

In other moves, housing benefit will be reformed with a maximum limit of £400 a week, in a package saving £1.8bn a year by the end of the Parliament.

Other benefits to be cut include the health in pregnancy grant while the Sure Start maternity grant will be restricted to the first child only and lone parents will be expected to look for work when their youngest child goes to school.

Bank levy

But there will be an extra £150 a year for the poorest families, through changes to family tax credits to ensure, Mr Osborne said, child poverty reduction targets would be met.

The government is also to introduce a medical assessment for Disability Living Allowance from 2013 for new and existing claimants.

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Mr Osborne also announced plans to help the low paid by raising personal tax allowances, taking an estimated 880,000 people out of the tax system and give millions of basic rate taxpayers a tax cut of £200 per year.

From January 2011, the Government will introduce a bank levy, which will apply to the balance sheets of UK banks and building societies and the UK operations of foreign banks. Mr Osborne said the move would raise £2bn a year once it was fully in place.

Mr Osborne said public sector workers paid more than £21,000 a year would have a two year pay freeze with those paid less getting a flat pay increase of £250 for the next two years.

The plan is the first step towards a key Liberal Democrat coalition demand of taking all those earning less than £10,000 out of tax.

'Enterprise-led recovery'

The chancellor must find £3.5bn to pay for the giveaway - which will be clawed back from top rate taxpayers - and Labour are likely to argue it is irresponsible in the current climate.

Mr Osborne also froze the Civil List payments to the Royal Family at £7.9m a year and said in future years they would be subject to scrutiny by the National Audit Office.

FROM BBC NEWS BLOGS
Continue reading the main story It is rare for a Budget to contain both an overhaul of the taxation system and a significant shift in the boundary between public sector and private sector
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Analysis from around the web
He stressed that the pain of his austerity measures would be shared by "everyone" - but said all would share in the proceeds of the "enterprise-led recovery" that he promised would follow.

"Yes it is tough, but it also fair," said Mr Osborne of his first budget, adding: "Everyone will share in the rewards when we succeed. When we say that we are all in this together, we mean it."

He said that the Office for Budget Responsibility (OBR) now estimated growth this year of 1.2% and 2.3% next year - compared to its previous forecasts of 1.3% of 2.6%.

Giving her response to Mr Osborne's statement, acting Labour leader Harriet Harman poured scorn on the Liberal Democrats for providing a "fig leaf" for their Conservative coaltion partners, arguing "this reckless Tory budget would not be possible without the Lib Dems".

"How could they let the Tories so exploit them?," she said, adding: "The Lib Dems leaders have sacrificed everything they ever stood for to ride in ministerial cars and to ride on the coat tails of the Tory government."

In a message last night to Liberal Democrat supporters, Deputy Prime Minister Nick Clegg made clear that his party was fully signed up to the coalition's economic strategy.

He rejected accusations that he had "sold out" to the Conservatives, insisting that the Budget would bear "the stamp of our Liberal Democrat values".