The British government announced on Monday it would pump £20 billion ($29.82 billion) into the economy in a last-ditch gamble to stave off a deep recession. Finance minister Alistair Darling's package, known as the pre-budget report, included tax cuts and brought forward £3 billion of capital spending. His speech to Parliament also contained plans for future tax rises to pay for the package.
FISCAL STIMULUSBritain's economy is on the verge of recession but Prime Minister Gordon Brown argues that the downturn can be shorter and less painful if Britain takes "extraordinary action" by giving a fiscal boost to the economy, particularly if other countries do the same.
David Cameron, leader of the opposition Conservatives, is against driving up the national debt. "They are throwing money at us now to take it back at a later date," he told a business conference ahead of the report.
HIGHER BORROWINGDarling announced borrowing will rise to £78 billion for the 2008/09 year, tearing up his previous forecast of £43 billion as falling tax revenues and higher government spending kicks in.
Borrowing will rise to £118 billion in 2009/10, or 8 per cent of GDP, he said. From 2010, it will fall to £105 billion, then £87 billion, £70 billion and £54 billion. By 2015/16, the government will borrow only to invest, he added.
LOWER GROWTH FORECASTSDarling was forced to change this year's budget growth predictions, issued in the March budget, to 0.75 per cent from an earlier estimate of around 2 per cent, and in 2009 to between -0.75 per cent and -1.25 per cent from 2.5 per cent.
The Bank of England had earlier forecast a painful contraction in 2009, while economists polled by Reuters, had predicted a contraction of 1.3 per cent next year. Darling predicted growth of between 1.5 per cent and 2 per cent in 2010.
NEW FISCAL RULESThe package confirmed Darling's earlier hints that the government would suspend its rule that limits borrowing to 40 per cent of Gross Domestic Product. Net debt will be 41.2 per cent of GDP this year and 48.2 per cent next year.
Its second rule, which states the government can borrow only to invest over the economic cycle, was also broken.
These two rules have defined the public finances framework since the Labour government came to power in 1997.
SALES TAXThe centrepiece of the plan was a temporary cut in sales tax paid on many goods.
The tax, known as value added tax or VAT, went down to 15 per cent from 17.5 per cent, effective from Dec. 1 until the end of 2009.
HIGHER TAXES IN FUTURETo persuade markets the government is serious about mending its finances once the economy picks up, Darling announced plans for deferred tax rises and public spending curbs.
A new 45 per cent income tax rate on high earners will be introduced if Labour wins the next election, up from the current top rate of 40 per cent.
The new tax would come in from April 2011 and affect people earning more than £150,000 a year.
The rise, the first since 1975, breaks a long-standing Labour pledge not to raise tax on high earners.
NATIONAL INSURANCEAll national insurance rates will be increased by 0.5 per cent from April 2011.
HELP FOR SMALL BUSINESSESThe government confirmed its earlier pledge to support small businesses whose access to bank lending has been restricted by the financial crisis.
Darling said he was delivering one billion pounds of tax cuts and two billion of loan guarantees.
He announced the government would defer a planned tax increase on small firms. Corporation tax for small firms was set to rise to 22 per cent from April 2009 from 21 per cent as part of a staged increase set out in the March 2007 budget.
He also extended a system of tax repayments to help businesses which were previously profitable but now making losses. Losses of up to £50,000 could be offset against profits made in the past three years -- benefiting 75,000 businesses, the finance minister said.
TAX CUTSTax cuts favoured the lower paid because of the government's belief that they are more likely to spend the money, rather than save it.
Darling trimmed income taxes for 22 million people in May, a concession financed by a £2.7 billion increase in government borrowing. The move was meant to compensate some 5.3 million low-paid people who lost out when the government scrapped a 10 per cent income tax band.
On Monday, he made permanent the rise in income tax allowances.
BUSINESS TAXESDarling announced an exemption for companies' foreign dividends from tax in 2009, in an effort to allay concerns over proposed changes to taxation of foreign earnings that have led several big companies to shift their tax domicile out of Britain.
WPP, the world's second-biggest advertising and marketing group, drugmaker Shire and media group United Business Media have announced plans this year to move their tax domicile to Ireland.
HOUSING, CONSTRUCTIONMajor lenders have agreed a three-month grace period for mortgage borrowers in trouble before banks begin repossession proceedings.
SAVINGSThe government confirmed it could save more money than planned through efficiency cuts in the public sector. It had originally targeted £30 billion of efficiency savings between 2007 and 2010 but now believes an extra £5 billion can be saved from areas such as procurement, asset management and corporate services, bringing the total to £35 billion.
ENERGYThe government will intervene in the future if progress is not made on "unfair" energy bill pricing.
VEHICLESIn 2009, vehicle excise duty rates for all cars will increase by a maximum of £5.
From 2010, differential increases in duty will be introduced. More polluting cars will see duty increased, up to a maximum of £30, while less polluting cars will see no increase or a cut of up to £30.
CIGARETTES, ALCOHOLThe Vat reduction will be offset by increasing duties on tobacco, alcohol and petrol.
Reuters
