A key challenge for the Chancellor in today's Budget was how he was going to to restore credibility to the public finances without choking off economic recovery and growth.
In the end, he's opted for a mix of two parts slower public spending and one part tax rises.
Looking at the Budget in detail, public spending increases are set to slow, from 1.1.% per year to just 0.7% per year after 2011. But because those cuts fall in the next spending round - and to the next government - the Chancellor didn't have to provide any details on the hard decisions on which cuts to make.
The tax rises planned for 2011-12 are also significant:
- £1.75 bn from fuel duty increases;
- £1.80 bn from a new 50p rate on incomes over £150k; and
- £4.82 bn from increases in NICs.
That's almost £8.5 bn (0.6% of GDP) in tax increase in 2011, the year the Chancellor expects the economy to grow by 3.5%.
The Chancellor also confirmed that the government borrowing will rise to £175 bn in 2009-10, requiring the government to issue £220 bn in gilts in 2009-10, a 50% increase over last year. Medium-term gilts account for half that increase, which could present a problem for the government if and when the Bank of England tries to sell back £75bn in medium-term gilts it will have bought because of quantitative easing.
The bottom line for UK manufacturers?
That if the Chancellor’s overly optimistic growth forecasts fail to materialise or if the government struggles to raise money in financial markets, businesses could face higher taxes in an effort to plug the gap.