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Expenditure Review

Public Expenditure Review 20 October 2010

The Government's plans to reduce Public Expenditure are announced. What does it all mean and why do we need the reductions?

Any difference between money that Government collects, from taxation or sales of assets, and its expenditure, affect Government borrowing. If expenditure exceeds revenues, Government borrowing increases to bridge the gap and vice versa if revenues exceed expenditure.

Government debt is currently running at record levels, fuelled most recently by the efforts of the previous administration to fund the bail out of the banks and keep the economy out of recession. In order to maintain our national credit rating (and keep our interest rates at present low levels), the present administration is keen to demonstrate that we are serious about reducing our debt, hence the reductions in expenditure declared yesterday.

The rest of this report sets out a few of the key announcements; first the positive outcomes, secondly reductions in expenditure and last but not least a reminder of the tax changes in the pipeline that we already know about and three issues announced today that do affect tax regulations, not least the introduction of a permanent levy on bank profits.

Positive outcomes - expenditure increased or maintained

  • NHS is to get a small funding rise: From £104bn to £114bn by 2014-15.
  • International development budget increased to £11.5bn by 2014-15.
  • The schools budget will increase from £35bn to £39bn over the next four years.
  • A new Pupil Premium scheme to support the education of disadvantaged children. £2.5bn is earmarked and aimed at supporting children from the lowest income households to reach their potential and narrow the attainment gap.
  • The science budget will be frozen in cash terms. Allowing for inflation, this is a cut of less than 10% over four years.
  • Investment in transport projects of £30bn including widening the M25 and the Crossrail train project.
  • Child benefits are to be retained for all children to age 16, or age 19 if in full time education. The proposal to withdraw child benefit for higher rate tax payers is confirmed.

Key benefits for older persons

  • Cold weather payments are to be retained and are now a permanent feature. Eligible households will receive £25 for each seven day cold spell recorded or forecast where they live.
  • Free TV licences for over 75's are retained.
  • Free bus passes for pensioners to be retained.
  • Free eye tests for pensioners to be retained.
  • Free entry to museums and galleries to be continued.

Other outcomes announced

  • Equitable Life policy holders to be compensated, at last! Government to make £1.58bn available, payments to policy holders should start next year.
  • TV licence fees frozen for 6 years and the BBC have taken over budgetary responsibility for funding the World Service programs.

Reductions in expenditure

Total cuts are planned to be 19% over four years. By implication we could assume that there will be no immediate, draconian changes but rather a continuing process of public expenditure reform over the period.

We have highlighted some of the key cuts below:

Public sector workforce

£3.3bn of savings has been achieved by the enforcement of a two year pay freeze starting in 2011-12. There will also be a reduction in the public sector workforce by 500,000 over the next four years. The Government is hopeful that many of those displaced will be taken up by new vacancies created in the private sector. To facilitate this new initiative the existing benefits system will be simplified through the creation of a new Universal Credit - to ensure that it always pays to work.

Defence budget cut to £33.5bn by 2014-15

The Strategic Defence and Security Review published on 19 October 2010 sets out the proposed changes in the scope of defence spending for the next four years.

Welfare cuts £7bn a year

Over £30bn of the overall savings were announced in the June Budget, £11bn of this amount were welfare savings. Particular focus in the additional measures announced yesterday has been given to reducing welfare costs and wasteful spending. Particular emphasis has been directed at getting more people off benefits and into work.

Pensions

The pension age will gradually rise to age 66 for men and women and will be phased in between 2018 and 2010. The increase is required to ensure that future planned increases in State Pensions are sustainable in the long term.

Public sector employee pension contributions are set to rise and final salary pensions for MPs are to end.

Miscellaneous

  • Royal household spending to be reduced.
  • Police spending to fall by 4% per year.

A reminder of tax consequences

The following tax increases will be implemented next year as disclosed in the Budget June 2010:

  • VAT rise to 20% on 4 January 2011
  • National Insurance Contributions are to increase by 1% from April 2011

As part of his expenditure review George Osborne also announced the following changes that impact taxation:

  1. £900m is to be invested in pursuing tax evasion.
  2. As mentioned above, child benefit will be withdrawn from higher rate tax payers.
  3. The UK will instigate a permanent tax levy on the profits of the banks. Details are to be published today.
  4. The Chancellor indicated that there will be increases in child tax credits next year of £30, due in the main to indexation adjustments.

If you have concerns about the specific effects of these cuts to your business please call. Don't forget that the effects will be felt in most cases over a four year period.

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