Emergency Budget raises VAT to 20 per cent

VAT is to rise to 20 per cent and government departments face cuts of up to 25 per cent, under an emergency Budget announced by the Chancellor, George Osborne.

Osborne set out the plans in the House of Commons on 22 June, the first Budget of the Conservative and Liberal Democrat coalition government.

Tackling the deficit

Osborne said the Budget was needed to tackle Britain's record budget deficit, which is running at more than £150 billion a year, the largest in peacetime.

He said the country was paying the price for years of excessive borrowing, and that failing to act would risk higher interest rates and a loss of confidence in Britain's economy.

The government aims to eliminate most of the deficit within five years, with around three quarters of the savings coming from spending cuts and a quarter from tax rises.

The main measures

The standard rate of VAT will rise from 17.5 per cent to 20 per cent from January. Capital gains tax will rise for higher-rate taxpayers.

Most government departments will face average cuts of 25 per cent over four years, although health and overseas aid are protected. Public sector pay will be frozen for two years, except for the lowest-paid workers.

Benefits will be linked to the consumer prices index rather than the retail prices index, and housing benefit will be capped.

The personal allowance, the amount people can earn before paying income tax, will rise by £1,000, and a levy on banks will be introduced.

Reaction

Osborne said the Budget was tough but fair. The Labour opposition, led by acting leader Harriet Harman, said it would hit the poorest hardest and put the recovery at risk.

The Institute for Fiscal Studies has said that some of the measures will fall more heavily on poorer households.

Business groups have broadly welcomed the Budget, particularly cuts in corporation tax.

The Office for Budget Responsibility

The Budget is the first to use forecasts from the new Office for Budget Responsibility, set up to provide independent assessments of the economy and the public finances.

What it means for councils

Local councils, including Birmingham City Council, are expected to face deep cuts to their funding in the Spending Review this autumn.