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Budget 2011 – a summary

Context

The Government’s Budget for 2011 brought relatively few surprises and markedly differed from last year’s bold announcements. Much of the content had already been leaked to the media over the preceding days and uncomfortable details on welfare expenditure, and departmental spending had been set out in last year’s budget.

Announcement of this year’s budget was not delivered in a comfortable context, however. The latest figures on the economy continue to confound expectations - GDP fell by 0.6% towards the end of 2010; the number of unemployed people recently increased to 2.53 million; unemployment among 16-24 year olds stands at 974,000; inflation has risen to 4.4%; and the Office for Budget Responsibility have been forced to downgrade their official estimates on growth to 1.7% for 2011-12. Further to this, the latest YouGov polling figures show that Labour have gained a 7 point lead in the opinion polls.

Chancellor of the Exchequer, George Osborne, made clear that this was to be a different type of budget to last year’s (“a fiscally neutral budget”), with three prevalent themes – a strong and stable economy; growth; and fairness. A Growth Strategy was also published alongside the budget, covering planned reforms to tax, regulation, investment, exports, and skills.

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Tax Simplification

Taxes are to be significantly simplified as 43 tax reliefs are abolished. Plans are also afoot to consult on the proposed merger of National Insurance and Income Tax. Corporation Tax is set to fall by an additional 1% this year to 26%, decreasing further to 23% by 2015 (representing the lowest rate of an advanced economy). The contributory principle will be maintained, however. There are also no plans to extend to individuals above State Pension Age. In other news, expected plans to abolish the Community Investment Tax Relief (CITR) will not go through and consultation will occur on how to make it more effective.

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Business (De)Regulation

A suspension will be introduced for business with less than ten employees from new domestic regulation for three years from the 1st April 2011. Existing proposals for specific regulations, costing business over £350 million a year to implement, will also be dropped. This includes not extending the right to request time to train to businesses with less than 250 employees and not bringing forward the dual discrimination rules in the Equalities Act. A public review will also be launched to reduce the stock of regulation.

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Skills Provision

Skills provision was a key area of spending (as opposed to tax) within the budget, with a major focus on youth unemployment. An additional £180 million of funding was announced for Apprenticeships. This will cover 40,000 places to support young unemployed people and a further 10,000 high level apprenticeships. To address the specific barriers faced by SMEs in accessing apprenticeships, the Government will support business consortia to set up and maintain advanced and higher apprenticeships schemes, supported by grants. There will also be an expansion of the University Technical College scheme (partnerships between universities, colleges and businesses), which will double in numbers to 24 separate institutions. More direct contact will also with the workplace through the funding of an additional 80,000 work experience places for young people, ensuring up to 100,000 places will be available over the next two years.

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Regional Enterprise

A total of 21 “Enterprise Zones” will be created. These will provide a 100% business rate discount up to £275,000 over five years for local businesses; allow business rates growth to be retained for a period of at least 25 years; and will allow for a radically simplified planning approach. The first ten of these zones will operate in Birmingham and Solihull; Leeds City Region; Sheffield City Region; Liverpool City Region; Greater Manchester; West of England; Tees Valley; North Eastern; the Black Country; and Derby, Derbyshire, Nottingham and Nottinghamshire. A further zone in London will soon be announced and a competitive process will be launched in the summer for interested Local Enterprise Partnerships to establish ten more zones.

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Personal Tax

From April 2011, the personal allowance for under 65s will increase by £1,000 to £7,475. The personal allowance for under 65s will then increase by a further £630 to £8,105 in 2012-13, with an equivalent £630 reduction in the basic rate limit to leave the higher rate threshold unchanged. As a result, this Budget does not create any additional higher rate taxpayers. From April 2012 the default indexation assumption for direct taxes (e.g. income tax, National Insurance, inheritance tax, capital gains tax and Individual Savings Accounts) will move from the RPI to the less-valuable CPI.

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Housing & Planning

A new presumption in favour of sustainable development will be introduced. A land auction model will be piloted for the sale of public sector land. The Government will also provide £250 million to support first time buyers to purchase a new-build property through the FirstBuy equity programme.

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Welfare Reforms

The Government will no longer remove the mobility component of Disability Living Allowance for people in residential care in October 2012. This will be reviewed as part of the wider reforms to be introduced. An amendment was also made to Housing Benefit to prevent the 10% reduction for Jobseeker’s Allowance claimants from occurring.

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Pensions Reform

The Budget announced that the findings of the recent Hutton review on pensions would form the basis for consultation with public sector workers and unions. A consultation paper will shortly be published on options for reform, which will include a proposal for a single tier pension, currently estimated to be worth around £140 a week.

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Charitable Giving

The rate of inheritance tax will be reduced from 40% to 36% for estates leaving 10% or more of their wealth to charity, from 2012-13. The Gift Aid benefit limit is also set to increase from £500 to £2,500 after April 2011, enabling charities to better reward donors. An online system for charities to claim Gift Aid will shortly be introduced 9and fully operational by 2013). A Gift Aid small donations scheme will allow charities to claim Gift Aid on up to £5,000 of small donations per year without the need for declarations. Government will also extend the passenger allowance of 5p per mile, which is already available to business, to volunteers.

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Green Economy

The Green Investment Bank will established with £3bn and will start operation in 2012-13. This is expected to leverage in an additional £18bn in private sector finance.

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Analysis

According to the Budget document, the structural deficit will be eliminated by 2014-15 and public sector debt will decline to 69.1% of GDP by 2015. According to the Office for Budget Responsibility (the independent body created to assess each budget), the Government’s policies have a greater than 50% chance of meeting the target for debt in 2015-16. This means that the Coalition’s current economic policy is far from undisputed. Indeed, much will depend upon the success of plans for growth as well as greater stability in global events.

The content of the 2011 Budget had much to be savoured. The increased investment in Apprenticeships is a welcome announcement, especially given the clearer focus on young unemployed people. Furthermore, the announcements on charitable giving are a significant boost. Reforms to Gift Aid will reduce the bureaucratic burden faced by charities and form a viable proposal to increase giving (which was largely lacking in the recent Giving Green Paper). The retention of the Community Investment Tax Relied is also to be welcomed, preserving a greatly-valued source of access to working capital for social ventures.

There are still certain measures to be clarified from a policy perspective, however. For the expansion in Apprenticeships to deliver balanced growth and be beneficial for small businesses, Group Training Associations and Apprenticeship Training Agencies will be vital. Closer working will also need to occur between BIS and DWP to encourage unemployed onto apprenticeship programmes. The exemption from regulation for micro-businesses may also create issues for the voluntary sector. Over half of voluntary organisations are classified as “micro-organisations”. According to such a reform, much of the sector may soon become exempt from employment policies related to flexible working and equalities.

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