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24 March 2011

Budget Analysis

George Osborne rose to give his second Budget since becoming Chancellor and insisted that he was taking measures essential to ensure economic recovery and put the British economy on the path to growth.  The Budget was met by varying responses from Christian groups, ranging from accusing the Chancellor of neglecting to address poverty, to not doing enough to address the national debt.   

The claims made were quickly dismissed by the opposition who criticised the Government for making too many cuts and as a result stifling economic growth.  Over the past year the economic forecasts have downgraded several times. In the emergency Budget shortly after coming to power in June last year growth in 2011 was projected at 2.3 per cent, This was reduced to 2.1 per cent in October, and this week Osborne announced it was expected to be 1.7 per cent. 

Further changes to the economic forecasts were made relating to inflation, borrowing and unemployment.  The most recent figures show CPI inflation in February 2011 at 4.4 per cent, and the Office for Budget Responsibility (OBR) suggests that it will remain between four per cent and five per cent throughout 2011, only dropping to the Government's target of two per cent in 2013.  The Chancellor will hope that this projection as well as the OBR's prediction that unemployment will peak in 2011 turn out to be correct.  

The most eye-catching part of the Budget was a reversal of plans to increase the duty on fuel, which was planned to jump by one per cent above inflation, so by five per cent.  And in addition to not implementing this increase fuel duty was immediately cut by a penny.  While this cut will not compensate for the increase in VAT that helped lift fuel prices to their present high, the Government committed to abolishing the yearly fuel duty increases for the life of this parliament.  This will be explicitly paid for by an increase in the tax paid on North Sea oil and gas, a tax that will be reassessed if oil prices dramatically decline.   

The Coalition Agreement committed the Government to taking steps each year to raise the starting threshold for income tax to £10,000.  In the Budget last year it was announced that the threshold would rise to £7,485 this April, and Osborne announced this week that it would increase by a further £630 next year.  A range of changes to the tax code were announced, including the removal of 43 measures aimed at simplifying taxation.  However, many more fundamental changes were hinted at including an assessment of how much the 50 per cent tax rate raised and the Government promised to consider whether high value properties needed taxing.  The biggest reform in the Government's sights is a merger of the National Insurance and Income Tax systems.  No firm steps were taken towards this goal in the Budget but a consultation will consider how this aim might become a reality. 

The Budget announced a series of measures that will be warmly welcomed by the charitable sector.  Changes to the Inheritance Tax code will mean that anyone leaving 10 per cent or more of their estate to charity pays 10 per cent less inheritance tax; this means the rate they pay is 36 per cent rather than 40 per cent.  From April 2013 a new scheme will allow charities to claim Gift Aid on up to £5,000 of donations without a declaration.  This will be particular helpful for charities that collect loose change and church offerings.  One other change that will affect charities is an increase in the mileage allowance that can be claimed as a non-taxable expense, instead of 40p per mile for the first 10,000 miles the new rate is 45p.  

The changes to inheritance tax were not universally welcomed with Church Action on Poverty commenting: "Reforms to legacies will allow the wealthiest people in the UK to avoid paying inheritance tax if they leave money to a charity. This could mean, for example, that millionaires can dodge some of their taxes by giving money to elite public schools."  

There were a wide range of measures aimed at stimulating economic growth and creating jobs.  Some of this comes through targeted spending such as £200 million that will go towards regional railways and £100 million for local authorities to fix pot holes.  There is also money dedicated to increasing the apprenticeships and the Chancellor declared that the Government would fund the establishment of at least 24 university technical colleges.  

The principle change made to encourage greater business activity was a reduction in the rate of Corporation Tax by two per cent to 26 per cent, with further incremental changes bringing it down to 23 per cent.  This reduction will have no impact for banks, with any benefit mitigated through an adjustment to the Bank Levy.  Enterprise Zones are another method that the Government hopes will stimulate growth, and in the Budget it was announced that 21 will be created across the UK, including in Manchester, Birmingham and London, with the locations for 10 more due to be unveiled.   

The Association of Christian Financial Advisors (ACFA) was critical of this Budget, but for very different reasons than Church Action on Poverty, they accused Osborne of doing "little to prevent [the] nation's financial wounds turning septic". Aidan Vaughan, chair of ACFA, said: "Our nation has to learn the painful lesson of 'spending less than we earn'. There is maybe another message to take from a financial squeeze - endeavour to keep your finances straight forward and beware of greed."