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A neutral Budget with a few surprises

George Osborne, the chancellor, introduced his second Budget yesterday saying: “This is not a tax-raising Budget, nor can we afford a give-away.”  Basically, he was completely constrained by the emergency Budget last year and the October Spending Review.

He was further handicapped by a downgrade in the forecasts for economic growth, coming from the Office for Budget Responsibility. Only five months ago in November, the OBR was forecasting growth this year of 2.1% but this has now been reduced to 1.7%. Growth next year has also been revised to 2.5% from 2.6%.

The Chancellor manages his balancing act in a positive way

The chancellor stuck largely to the introduction of a number of supply-side measures to facilitate growth in the economy, although how effective they might be is open to debate.

One major surprise was a cut in corporation tax by 2% from this April, rather than the 1% which had been previously announced. But, on top of this, it will continue to drop by 1% each year for the next three years. Already, the advertising company WPP has said that it may return its tax base to London from Ireland, where it had relocated to take advantage of the lower tax regime in place there. The reductions in corporation tax will be paid for by an increase in the levy on banks.

The chancellor also announced 21 new Enterprise Zones around the country, which would give tax breaks to companies and reduce planning regulations. There were also other cuts in red tape announced, particularly for small companies.

On a personal basis, an increase in the personal tax allowance of £1000 had already been flagged for this April, but the chancellor announced that this would be increased by a further £630 in April 2012, to reach £8,105.  This is obviously of major significance to the lowest paid.

One very popular measure was that the fuel price escalator which would have raised fuel prices this April by about 5p a litre has been suspended, and on top of that an immediate cut in fuel duty of 1p was announced. This will be paid for by an increased tax on North Sea oil companies.

There were also plans costing £250m announced to help 10,000 families buy a home for the first time, which would be financed by the bank levy. Although some commentators doubt that this will have much effect.

On balance this was a clever Budget, given the constraints the government was under, and did something to sweeten the pill of the general austerity measures resulting from the government’s determination to slash public sector borrowing.

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Posted in economic growth, government spending, Public Finances, taxation

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