British chancellor George Osborne George Osborne produced the harshest budget in a generation in Britain today, slashing spending, raising taxes and slapping a levy on banks in a drive to cut a record budget deficit to almost nothing in five years.
Mr Osborne said government spending would fall by around 25 per cent over four years and announced VAT would go up to 20 per cent from 17.5 next year, with a new £2 billion levy on banks introduced at the same time.
The VAT increase will be welcomed by retailers in the Republic losing millions of euro in business each year from cross-Border shopping. However, they will be disappointed the increase is not being introduced until after the busy Christmas period.
Nearly a million of the poorest paid people will be taken out of the income tax net altogether by raising its starting point and the headline rate of corporation tax will drop by one percentage point to 27 per cent next year and then keep falling to 24 per cent within four years.
Mr Osborne said just over three-quarters of the tightening would come from spending cuts and the rest from tax rises. Welfare payments would be targeted and even the expenditure of the royal family will be subject to closer scrutiny.
"When we say that we are all in this together, we mean it," Mr Osborne told MPs in his first budget since the Conservative-Liberal Democrat coalition government came to power last month.
The level at which the lowest rate of income tax is paid was raised by £1,000 to £7,475, exempting 880,000 low earners.
The higher-rate income-tax threshold will remain frozen until 2013-14, Mr Osborne said, adding that his long-term objective is to raise the ceiling at which the lower-paid start paying tax to £10,000 a year. "I believe it is important to lift people out of the income tax system," he told MPs. "It demonstrates that this coalition government puts fairness first."
There will be no increase in taxes on beer, wine and cigarettes and a planned increased in duty on cider would be axed.
Mr Osborne announced the public sector pay freeze would be extended for two years for staff on £21,000 or more. Child benefit is to be frozen for three years while tax credits will be cut for families with incomes over £40,000 a year.
The Government is to move quicker than previously planned towards raising the state pension age to 66.
Housing benefit payments are to be capped and disability living allowance claimants are to face a new medical assessment. He also warned that Government departments whose budgets have not been ring-fenced would be faced with cuts of 25 per cent in the autumn spending review.
Mr Osborne said the welfare shake-up will save the country £11 billion by 2014/15.
He also laid into the economic legacy he had inherited from the previous Labour government.
"This is an emergency budget, so let me speak plainly about the emergency that we face," he said. "The coalition government has inherited from its predecessor the largest budget deficit of any economy in Europe with the single exception of Ireland.
"One pound in every four we spend is being borrowed. What we have not inherited from our predecessor is a credible plan to reduce their record deficit."
Mr Osbornes plans to cut the deficit are likely to go some way to assuaging rating agencies' concern given the sovereign debt crisis spreading through the euro zone.
Rating agencies had warned Britain's triple-A status could be at risk if Mr Osborne's plans were found wanting.
Some economists say heavy fiscal tightening could endanger the recovery out of the worst recession since the second World War. US president Barack Obama warned fellow G20 leaders last week not to cut stimulus too soon.
But Mr Osborne believes there is no time to waste though he admitted that growth will be lower this year and next because of his budget.
The independent Office for Budget Responsibility, established by Mr Osborne last month, cut its forecast for economic growth to 1.2 per cent this year from 1.3 per cent published last week. GDP growth next year is seen at 2.3 per cent instead of the 2.6 per cent published last month.
A tax on banks had been expected to cost the industry between £1 billion and £5 billion, depending on its structure and scale. Mr Osborne said it would come into effect at the start of 2011 and will raise about £2 billion.
Agencies