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Austerity Continues For UK

by Robert Lee,, London

01 December 2011

It may prove hard to avoid recession in the UK, the Chancellor of the Exchequer George Osborne has said, unveiling a package designed to ensure the government meets its fiscal targets in spite of seemingly gloomy economic prospects.

With what turned out to be in effect a mini Budget, Osborne used his Autumn Statement to outline the complex economic situation facing the UK and to stress that the government will do whatever it can to protect the country from ongoing problems in Europe. He said that with much of Europe under threat from a double-dip recession, it may prove difficult for the UK to escape this trend. However, the government is "now undertaking extensive contingency planning to deal with all potential outcomes of the euro crisis".

In spite of these warnings, Osborne also pledged to "build the foundations for future demonstrating that this country has the will to live within its means and keep interest rates low; by acting to stimulate the supply of money and credit, to make sure those low interest rates are passed on to families and businesses; [and] by matching our determination on the deficit with an active enterprise policy for business and with lasting investment in our infrastructure and education, so that Britain can pay its way in the future."

Above all, Osborne was clear that the tight budget rules set out by the government each year must be met and kept.

There were two main thrusts to the statement: firstly, the Chancellor will not adjust the overall totals set out in the Spending Review, but secondly, he was to introduce significant savings in current spending to make the fiscal position more sustainable in the medium and long-term. Among the plans were a series of tax measures and pledges.

Osborne's assertion that he will fight European plans for a financial transactions tax (FTT) will be welcome news for those in the City and business communities who have claimed over the past weeks that the tax would represent economic suicide for London's financial sector. Osborne said that the tax is not a tax on bankers, but is rather a tax on people's pensions. His plan is instead to stick with the permanent bank levy he introduced last year, and to raise the rate of the levy to 0.088%, effective as of January 1, 2012.

In order to help stimulate innovation in the UK, Osborne pledged the government to the introduction of an above the line research and development (R&D) tax credit regime in 2013. He said this initiative is the result of the government having listened to the ideas of business groups, and that it will offer increased visibility and generosity in the R&D system. The government is also undertaking a major simplification of the tax code, with Osborne reminding parliament of the consultation on proposals to merge income tax and national insurance contributions.

He confirmed that he will publish next week new rules on the taxation of foreign profits, "so that multinationals stop leaving Britain and instead start coming here." The crackdown on tax evasion will continue, with the government taking steps to ensure employers making asset-backed pension contributions do not receive unintended excess tax relief.

The Enterprise Investment Scheme is to be extended, specifically to aid start-up businesses secure vital seed investment. From April 2012, anyone investing up to GBP100,000 in a qualifying new start-up business will be eligible for income tax relief of 50%, regardless of the rate at which they pay tax.

Tax on any capital gains invested through a new Start Up Britain scheme will be also be waived during 2012. Osborne said this could be afforded through a freeze on the general capital gains tax threshold for next year.

The government will proceed with the extension of Air Passenger Duty (APD) to flights aboard business jets, effective from April 2013. Details will be set out in the Government’s response to the APD consultation in December.

Turning away from specifically business related tax measures, Osborne also detailed plans to ease the cost of living. At the last Budget, he cut fuel duty by GBP0.01 per litre, but made no promises on hikes scheduled for next year. At the Statement, however, he scrapped the intended GBP0.03 rise planned for January, 2012, and reduced the increase scheduled in August from GBP0.05 to GBP0.03. According to Osborne, taxes on petrol will be GBP0.10 lower than would have been the case without the government's actions. He estimates that the average family will save GBP144 in fuel expenditure by the end of 2012. Unlike in the Budget, when the supplementary charge levied on North Sea oil production was hiked to fund the fuel duty cut, Osborne did not outline any such controversial funding package in this instance.

Osborne's initiative here was tempered by some less positive alterations to tax credit rates. Working age benefits, the disability elements of tax credits, and the child elements of the Child Tax Credit are to be increased in line with inflation next year. However, no other elements of the Working Tax Credit will be uprated in 2012, and the government will no longer go ahead with the additional GBP110 rise in the child element, over and above inflation, that was planned. Instead, Osborne said that the increases in the personal income tax allowance brought in earlier this year were the best way to support those on low incomes.

Published alongside Osborne's Statement, the independent Office for Budget Responsibility's (OBR) latest figures show a significant downward revision in growth prospects. Assuming that the eurozone crisis is resolved, the UK's economy will grow this year by 0.9% and by 0.7% next year. Growth of 2.1% is forecast in 2013, with 2.7% expected in 2014 and 3% in both 2015 and 2016. Were the eurozone to fail to rectify the situation, the OBR warns of a "much worse" outcome for the UK.

The current structural deficit is forecast to fall from 4.6% of GDP this year to a surplus of 0.5% in five years time, with the debt to GDP ratio - likely to stand at 67% this year - set to peak at 78% in 2014-15. Osborne justified these figures by saying that they demonstrate that borrowing and debt levels are falling, albeit not at the speed the government had originally desired.

Wrapping up the Statement, Osborne said that there are no quick fixes available, and that the government does not intend to offer any. Instead, he said that: "What we offer is a government that has a plan to deal with our nation's debts... a government determined to support businesses and support jobs; a government committed to take Britain safely through the storm."

TAGS: tax | investment | economics | business | pensions | air passenger duty (APD) | tax incentives | interest | fiscal policy | gross domestic product (GDP) | budget | tobin tax | United Kingdom | tax credits | multinationals | tax rates | tax breaks | tax reform | inflation | individual income tax | research and development

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