Will Osborne’s Plans Keep the UK Deficit in Check?

Critics and fans alike kept a close eye on U.K. Chancellor of the Exchequer George Osborne‘s speech last Wednesday when he delivered the government’s budget plans. Remember, the U.K. has been on the hot seat for quite some time now as credit rating agencies have been pressuring the government to keep its budget deficit in check.

Things got a little testy a few hours before Osborne’s speech, as public sector net borrowing figures came in at £12.9 billion in February, more than double the projected £5.2 billion figure. And here we thought that the government was trying to cut back on its spending – not borrow more!

Still, Osborne was determined to come out with an optimistic statement and emphasized that the new budget plans would “reward work, back business and reform the tax system.” Big words from the Chancellor, eh? The question is, how effective will the new plans be? Let’s take a closer look at the details!

One of the big headliners was plans to cut the top rate of the income tax bracket. Currently, British citizens who are earning more than £150,000 per year are being taxed at 50%. The plan is to reduce this figure to 45% since Osborne thinks that the rich have good tax ninja skills anyway.

Meanwhile, taxes on home purchases worth more than £2 million will increase from 5% to 7%, while a 15% tax will be implemented on residential properties purchased by companies set up exclusively to avoid tax.

Osborne's budget plans

While the reduction in the top tax bracket may result in a £100-million reduction in tax collections, Osborne claims that this will be equal to less than 20% of what the government plans to make by raising taxes on home purchases and closing other tax loopholes.

Corporate tax rates will also be cut from 26% to 24% later this year, and will eventually fall to 22% by 2014. By doing this, Osborne plans to encourage business and financial investment in the country.

But enough about the big guys. What are Osborne’s plans for the low and middle-income families?

One of the major plans is to raise the basic income-tax allowance, which is basically the amount that workers can earn before they pay income taxes. Starting 2013 the figure will be raised from £8,105 to £9,205, with the Chancellor saying that he would raise it to a nice round figure of £10,000 in due course.

Another change that got the public’s attention is the government’s plans on child benefit cuts. Instead of completely phasing out the benefit, only families with members earning £50,000 or more will feel the change. It is estimated that around 1% of the benefit will be taken away for every extra £100 earned over £50,000.

Not even pensioners were spared from the changes. Apparently, the government is already reviewing the state pension age, which could require millions of Britons to work longer if the pension age is lifted. Aside from that, age-related allowances (£10,500 for those aged 65-74 and £10,600 for those above 75) will also be frozen. Yikes!

With those in mind, critics have dubbed the government’s plans as “budget for millionaires,” while others say that Osborne has done pretty well considering that he has limited options.

Right now market geeks are estimating that the government will show a budget deficit of £126 billion in 2011, a full billion less than previously expected. Debt as a percentage of GDP is also expected to peak at 76.3% in 2014-2015, also lower than previous estimates.

Speaking of GDP, the government expects economic growth in 2012 to clock in at 0.8%, which is lower than the long-run estimates of a 2.5% growth but is enough for the country to avoid a technical recession for now.

This is probably why credit rating agencies like Fitch remain cautious regarding Osborne’s plans. Fitch announced that while the latest budget plans affirm the government’s commitment to its deficit-reduction plans, it still leaves the economy vulnerable to economic shocks.

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