Intelligence Briefing - Emergency Budget Special

Published: 22/06/2010

Overview | Key measures | Budget round up | Outlook for public finances and the economy


  • Chancellor sets out aggressive deficit reduction plan, but one that looks to be deliverable
  • The Budget has given manufacturers much-needed clarity on deficit-reduction
  • And five-year plan for reform and new approach to tax policy will boost predictability of tax system
  • But Budget falls short of rebalancing economy
  • Cuts to capital allowances and Annual Investment Allowance will raise cost of investment
  • Capital budgets set for deep cuts that will curb productivity and growth

Key measures

Corporate Tax Reform

Main rate of corporation tax will be reduced from 28% to 24% over the course of four financial years from April 2011. The small profits rate will be reduced to 20%.

Tax Policy

The government published a new plan to change the way the government proposes, consults on, legislates, implements and evaluates changes to the tax system.

As part of its five-year plan for reforming corporation tax, HMT will begin a series of consultations on the taxation of foreign profits, intellectual property and research and development.

Capital Allowances

Reduction in the rate of capital allowances from 20% to 18%, and for longer life assets from 10% to 8% from April 2012. The Annual Investment Allowance was reduced from £100,000 to £25,000 per year from April 2012.

Capital Gains Tax

Rate of capital gains tax has been increased for higher-rate tax payers, to 28%. Annual exemption of £10,000. Entrepreneurs’ relief increased to £5 million in lifetime capital gains.

National Insurance Contributions

The Government inherited plans for National Insurance rates to increase by 1 per cent in April 2011. The effect of the employer rate rise will be largely reversed by increasing the threshold for employer National Insurance Contributions (NICs) by £21 a week above indexation.

Energy taxation

The Government will assess how the energy tax framework can provide the right incentives for investment and will publish proposals to reform the climate change levy in order to provide more certainty and support to the carbon price. Subject to consultation, the Government intends to bring forward relevant legislation in Finance Bill 2011.

Green Investment Bank

Following the Spending Review, the Government will put forward proposals on the creation of a Green Investment Bank to help the UK low-carbon investment. The Government will consider a wide range of options for the bank’s scope and structure.

Retirement age

The Government will review when to increase State Pension Age to 66. The Government will also consult on phasing out the default retirement age from April 2011.

Round up

The coalition had certainly prepared the ground for the raft of tough measures this Budget would bring forward in order to get the public finances back into the black. But the Chancellor not only needed a deficit reduction plan that was achievable, he needed to present one which supported longer term economic growth and investment.

Public finances back on track

public sector net borrowing (£bn)

Source: HM Treasury

The numbers speak for themselves on the first objective. Last week the Office for Budget Responsibility forecast an even larger structural deficit in the public finances than previously expected. But significant cuts to welfare budgets, a new bank levy, cuts to investment allowances and an increase in VAT were among the measures announced today to help plug the gap.

On the spending side, the government are sticking the savage cuts to capital budgets announced by the previous government. And while individual department spending totals won’t be revealed until the Autumn, Ministers will be spending the Summer identifying cuts of around 25% of their budgets.

Not all the revenue raised will be used to pay down the deficit as there were some giveaways for lower income households and pensioners and the Chancellor stuck with his pre-election pledge to cut the headline rate of corporation tax, choosing to do it over time rather than in one hit. Together the measures will bring public sector net borrowing down to 2% of GDP by the end of the parliament. It was an aggressive deficit reduction plan, but one that looks to be deliverable.

We are less convinced that the measures will also deliver the longer-term, better balanced growth the economy needs. The Chancellor stated that business investment and exports need to make a greater contribution to growth, but the cuts to investment allowances are at odds with this. The headline rate of corporation tax provides only one signal that the UK is open for business. For smaller companies investing in modern machinery after April 2012, there will be cashflow consequences from the change that will hurt their ability to reinvest in their own competitiveness.

The outlook for public finances and the economy

OBR initial forecasts

Emergency budget forecasts







GDP (% change)







Public sector net borrowing (£bn)*







Public sector net borrowing (% GDP)*







Debt ratio (% GDP)*







Source: HM Treasury

* Public finance figures are for 2010-11, 2011-12 and 2012-13

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