The UK better brace itself for a harsh round of austerity measures now that Chancellor of the Exchequer George Osborne unveiled the emergency budget plan. Many are speculating that these spending cuts and tax hikes would derail the UK’s already feeble economic growth, possibly resulting in a double-dip recession. Yet what do I see? A pound rally after the budget release! What gives?
Apparently, Osborne countered the negative outlook for the UK economy and even projected a 1.2% economic expansion for this year and a 2.3% growth in GDP in 2011. Although he admitted that the austerity program would be tough, he remained optimistic that these belt-tightening measures would contribute to economic and fiscal stability.
I have to admit that the measures that will be implemented don’t look pretty on paper.
First, Osborne hit the UK public with a 2.5% hike in the value-added tax (VAT). This brings the VAT to a whopping 20%, one of the highest in all of Europe! In addition, public sector earners would not be receiving any raises over the next two years. How is anyone going to get any shopping done? Mama Gump needs her new Burberry wallet!
The government also plans to increase the capital gains tax up to 28.0% while also raising the tax for higher earning households and individuals. This was done in order to make sure that the rich will account for a larger portion of the burden than the poor. Ha! It’s about time if you ask me!
The government plans to cut public spending by a whopping 25%, since their goal is to reduce the public deficit by 180 billion GBP over the next five years. This cutback in spending should account for the remaining three fourths of the measures needed to meet the goal. Pretty ambitious, eh?
In the meantime, the government plans to rely on the private sector to keep the economy afloat and avoid a double-dip recession. Osborne wants the UK to have the most competitive corporate tax regime and plans to achieve this by reducing corporate tax by 1% each year for the next four years. Hopefully this will spur more activity in the economy.
As expected, the planned emergency budget was tough but very decisive. Sure, all the spending cuts and tax hikes could take a serious toll on economic growth for the next two years, but its positive longer-term effects far outweigh sacrifices that will be done.
This ambitious plan, which aims to restore confidence in UK’s public finances, will basically help preserve the country’s precious AAA sovereign credit rating status. Although it creates the possibility of suppressing economic growth and pushing the UK back into recession, it will also provide some support for the pound like we saw yesterday.
I guess Osborne is correct… It’s time for the UK to finally pay for their financial crimes of the past in order to create a much brighter future! Like my favorite butler, Alfred, said in The Dark Knight, “The night is always darkest just before the dawn.”