Tuesday, 22 June 2010

The Coalition's First Budget

I have just walked out of the House of Commons, having listened to - and spoken in - the budget debate. This budget was never going to leave a smile on anyone's face. But that is not how it should be judged. In the wake of the worst recession - and burdened with largest budget deficit -since the war, today we needed to see resolve: a dual determination to cut the deficit, and fire up the economy to create jobs. The budget is not perfect, but it is a solid start.

First, the Chancellor set out a coherent plan to cut the deficit in this Parliament. That will restore market confidence in the British economy, stave off the threat of an IMF bailout and prevent higher interest rates and even higher taxes - the budget has mitigated the real risk of a punishing double-dip recession.

Second, the government has paved the way for a rigorous spending review in the autumn, by freezing public sector pay, pledging to review public sector pensions and setting the stage for an overhaul of the current welfare system.

Third, the Chancellor introduced a range of measures to fire up business so we can create jobs - the only way we will climb out of the present rut. Extended loan guarantees for small businesses and cuts to corporation tax and national insurance will help - the Federation of Small Businesses has already welcomed these measures.

Fourth, there is some relief for families, pensioners and those on lower incomes. Local authorities will be given support to freeze council tax for a year, almost a million people will be taken out of income tax altogether, whilst the link between pensions and earnings has been restored. The budget has been carefully crafted so that it is regarded as 'fair', sparing the poorest from bearing the brunt of the inevitable cuts in spending.

Of course, the increase in VAT will court controversy. The left will criticise it as a regressive tax that punishes those on lower incomes. That is based on a crude calculation of the revenue raised, measured as a percentage of income. However, as the Institute for Fiscal Studies point out, VAT turns out to be a progressive tax when measured (over the longer term) as a percentage of spending. In any event, thirteen years of reckless state spending foisted this unpalatable decision on the new government.

Finally, Capital Gains Tax will be increased to 28% for higher rate taxpayers - below the levels some had feared, and with business relief. I had been concerned about this proposal, and wrote to Treasury Ministers about its potential impact on those who have responsibly saved over many years. The eventual outcome is a compromise, one of the prices for coalition with the Lib Dems. I will continue to press for it to be reviewed, as the public finances allow.

The bottom line: the government deserve credit for setting out a coherent plan to clear up the mess the last government left behind. (You can read my speech in the debate here.)


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