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Budget 2011 - a reflection

Investment | Shares

By Justin Modray, published 24 March 2011.
Helpful? 11

Will the Government's chosen path to lead us out of the financial abyss work?

The Budget re-confirms that the Government is banking on private sector growth to more than compensate for public sector cuts and pull us all out of trouble. It's a massive gamble (see my explanation why here).

Optimistic growth

If it works the annual spending deficit could be culled by 2015/16, but if it fails we could find ourselves in an increasingly deeper hole. This year's growth forecast has already been reduced from 2.1% to 1.7% and the projected 2.5% next year and 2.9% in both 2013 and 2014 looks optimistic.

Impact on families

The extra £1,000 personal allowance will save basic rate taxpayers £200 annual income tax, but shrinking the basic rate tax band will leave higher rate taxpayers a little worse off. And the planned 1% rise in NICs will kick in from April , ouch. Not to mention frozen child benefit and reduced child tax credits for families on incomes above £25,000 (more details here), the middle classes could certainly start to feel the pinch next tax year.

Rising energy and food prices have led to high inflation, which means especially big tax hikes on cigarettes and alcohol, as duty is rising at 2% above inflation. Fuel duty is being cut by 1p and the 1p 'escalator' has been ditched in favour of a 'stabiliser' policy that will reinstate the 1p extra annual increase only if the oil price falls below $75 a barrel. But while a nice gesture, given current oil prices it'll make bugger all difference to most households who are reluctantly spending an increasing proportion of their income of fuel.

Happy businesses?

While many households will probably find themselves worse off overall following these changes (with high fuel and food prices rubbing salty into their wounds), businesses have more reason to be cheerful. Reductions in corporation tax and planning red tape coupled with new enterprise zones and proposed changes to EIS/VCT rules, designed to encourage more private investment, will hopefully give business a boost and attract more multi-national companies to our shores (even if you do end up with a factory being built down the road from you). And the doubling of entrepreneur's lifetime relief to £10 million (i.e. 10% CGT) might stimulate more business start-ups.

In summary

All in all I don't think it was a bad Budget. The Government's chosen path is a big gamble, but I'm not sure they have any other realistic options. Trying to spend their way out of a gargantuan deficit would be an even greater risk. But when tax rises kick-in in April or earlier and public spending cuts really start to hurt I fear the relied upon private sector growth won't happen quickly enough to stave off the threat of recession. I really hope I'm wrong.

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