The Chancellor of the Exchequer, George Osborne, has told the British parliament that today's emergency budget 'deals decisively' with the country's record debts, as it pays for the past and plans for the future. He said that it will be tough, but fair.
Delivering his first Budget, Mr Osborne said that the UK has the biggest deficit in Europe - apart from Ireland - with £1 sterling in every £4 being borrowed.
He said that unless the Government delivers concrete measures to tackle debt, the consequences would be 'higher interest rates, more business failures, sharper rises in unemployment and potentially a catastrophic loss of confidence and the end of the recovery'.
Mr Osborne says forecasts from the newly created Office for Budgetary Responsibility show growth in the UK economy for the coming five years estimated to be 1.2% this year and 2.3% next year; then 2.8% in 2012, followed by 2.9% in 2013; then 2.7% in 2014 and 2015.
He predicted that the country's unemployment rate will fall over the next four years and added that the inflation target will remain at 2%.
Outlining new OBR forecasts, he said that public sector net borrowing will be £149 billion this year, falling to £116 billion next year, then £89 billion in 2012/13 and £60 billion in 2013/14. It will fall from 10.1% of GDP this year to 1.1% in 2015/16, he stated.
He added that public sector net debt as a share of GDP will be 62% this year, 70% in 2013/14, 69% in 2014/15, and then 67% in 2015/16.
Parliament was told that the coalition Government believes the bulk of debt reduction must come from lower spending, rather than higher taxes - roughly 80% through spending cuts and 20% through higher taxes.
Mr Osborne promised that Britain will not be joining the euro during the Government's term of office and has abolished the 'euro preparation area' from the Treasury.
Irish reaction to UK budget
Retail Ireland, the IBEC group that represents the Irish retail sector, has said that the UK VAT rate increase has major implications for the retail sector.
'This is a further nail in the coffin of cross border shopping,' Retail Ireland director Torlach Denihan said.
'The UK VAT increase will reduce some of the distortions that contributed to cross border shopping, helping preserve the 267,000 jobs in retailing in Ireland.'
Chambers Ireland said that 'Today's announcement has the potential to bring real relief to many Irish businesses by further reducing cost differentials between Ireland and the United Kingdom.'
The Minister for Enterprise, Trade and Innovation Batt O'Keeffe TD said the decision by the British Government to increase its VAT rate, coupled with the decline in value of the euro against the sterling pound, will stimulate our domestic economy and create jobs.
'The move will increase consumer demand and generate retail sales at a time when we need every possible support to create jobs and build for economic recovery,' Minister O'Keeffe said.
'The move will severely curtail the loss in revenue to our economy as a result of cross-border shopping, which was estimated to be worth up to €600m.
'It also has very positive implications for our exports and our Exchequer taxation receipts.'
New bank levy from next January
From January 2011, Mr Osborne said the government will introduce a bank levy, which will apply to the balance sheets of UK banks and building societies and the UK operations of foreign banks. Smaller banks will not be liable for the levy, which when fully in place is expected to raise over £2 billion per year, he added.
He said that corporation tax will be cut next year to 27%, and by 1% annually for the next three years, taking it down to 24%.
On January 4 next year, the main rate of VAT will rise from 17.5% to 20%, Mr Osborne said. He said the VAT rise will generate more than £13 billion a year by the end of the government's term and zero-rated items such as food and children's clothes will remain exempt from the tax.
The rate of capital gains tax in the UK will remain at 18% for low and middle-income savers but from midnight, taxpayers on higher rates will pay 28%, Mr Osborne said.
He said there will be no new increases in duties on alcohol, tobacco or fuel after the 'substantial increases' announced in Labour's March Budget. Labour's plan to increase the duty on cider by 10% above inflation will be scrapped from the end of this month, he added.
'The truth is that this country was living beyond its means when the recession came and if we don't tackle pay and pensions, more jobs will be lost,' the Chancellor of the Exchequer said.
Public sector workers facing two year pay freeze
He said the government is asking public sector workers to accept a two-year pay freeze, with protection for the 1.7 million public servants earning less than £21,000 sterling. Those low-paid workers will receive a flat pay-rise worth £250 in both years.
The minister also said that the government will accelerate the increase in state pension age to 66.
He said that from next year tax credits and public service pensions will rise in line with consumer prices rather than retail prices, saving over £6 billion a year.
On income tax, Mr Osborne said that personal income tax allowance will be increased by £1,000 in April to £7,475. This will result in about 23 million basic rate taxpayers gaining up to £170 a year. He also stated that the higher rate income tax threshold will remain frozen to 2013/14, with a long-term objective to increase the personal allowance to £10,000.
He also said the Government will look at how to dispose of its shareholding in air traffic body NATS, the student loan book will be sold and the future of the Tote will be resolved.
'Today, we have paid the debts of a failed past and laid the foundations for a more prosperous future,' Mr Osborne said as he concluded his budget speech.
