News details
The implications of the emergency budget
6/28/2010
Alok Dhanda offers his thoughts on what the emergency budget will mean for the North East.
George Osborne called his first budget ‘tough but fair’ and everyone was certainly braced for the worst, particularly those of us in the North East.
The increase of VAT to a startling 20% (effective from 4 January 2011) was undoubtedly the most drastic feature of this budget, as it will be affecting everyone, especially the high proportion of low earners in the region.
However, considering that the VAT increase will generate up to £13bn a year, it is something of a necessary evil. There is likely to be a rush of people getting their Christmas shopping in early, as well as any large purchases such as cars. Everyone will feel the pinch of the rise in consumer goods prices when January arrives.
As expected, George Osborne also announced that severe cuts would be made to the benefits system. In the North East, where many of us depend on one benefit or another, this news will have a major effect, from families to pensioners. Child benefits will be frozen for the next three years, the health in pregnancy grant is to be abolished from April 2011, and the Sure Start maternity grant will be restricted to the first child. Lone parents will be expected to look for work when their youngest child goes to school, and a new maximum limit of £400 a week will be applied to Housing Benefit. Nobody will be escaping the need to tighten their belts in the coming years.
From 2011 - except for the state pension and pension credit - benefits, tax credits and public service pensions will rise in line with the Consumer Price Index, rather than the generally higher Retail Price Index, saving over £6 billion a year.
Perhaps one of the most worrying announcements for the North East, which is so heavily reliant on public sector jobs, is the two year pay freeze for public sector workers who earn more than £21,000. However, 1.7 million of those earning less than £21,000 will be getting a flat pay-rise worth £250 in both years, which is some small consolation.
However, it is not all bad news for the region by any means. The tax-free personal allowance on income tax will be increased by £1000 in April, giving 23 million people up to an extra £170 per year, which is very welcome news. This will mean a rise from £6,475 to £7,475.
There is also some comfort for the North East in the fact that anyone who sets up a new business will be exempt from £5000 of National Insurance contributions for each of the first 10 employees they hire. It is hoped that, because of this, more new businesses will be encouraged to set up outside of London, the south-east and east of England, where the exemptions do not apply.
More good news includes that the upgrade of the Tyne and Wear Metro will go ahead as planned, which plays such an important part in getting thousands of commuters to work every day, and a Regional Growth Fund will be created to help fund Regional Capital Projects over the next two years. Providing more capital spending is extremely necessary, as many businesses here depend on contracts with public sector capital projects. However, the Capital Spending Review in October will reveal more about these plans.
Higher-rate taxpayers will now pay 28% on their capital gains, (which could have been a lot worse – it was potentially going to rise to 50%), whilst the tax for basic rate taxpayers will be remaining the same. Corporation tax will be cut by 1% per year for four years from next year, bringing it down to 24%. The smaller rate is also being reduced from 21% to 20%.
Everyone was prepared for the worst with regards to this budget, but in truth, it has not neglected the North East as much as we feared. There are promising plans for businesses, and good news about the rise in the personal allowance. Although the sharp rise in VAT and the cuts to benefits and public sector pay freezes will have a serious effect on the region, there is a sense of hope that we should be able to pull through it in the long term.
For further information about how Alok Dhanda can help you with your personal or business planning needs, contact Dhanda Financial, 52 Dean Street, Newcastle upon Tyne, NE1 1PG, telephone 0191 255 8960, or email alok@dhandafinancial.com
