LONDON—The harsh spending cuts anticipated from the United Kingdom’s coalition government were revealed Tuesday with the Conservative/Liberal Democrat’s first budget. What amounts to an estimated 25-percent cut in public spending is very much thought of as a Conservative-led budget with traditional Lib Dem ideals showing very little influence.
A nervous public sector was downbeat over the two-year pay freeze for those who earn more than £21,000 (US$31,300) a year. Conservative Chancellor George Osborne said the state now accounted for "almost half" of all national income and that this was "completely unsustainable".
The budget comes just weeks after the announcement of around £12 billion (US$18 billion) of cuts in public spending. Cuts across the board will include travel costs as well as spending on events and meetings, something that will particularly affect hotels in the provinces, which have previously benefited from significant public spending in the conference market.
But small-business-focussed tax cuts, Osborne maintained, will mean that small businesses will be rewarded with the lowest tax rates in history and the aim is to encourage entrepreneurship across all industries. Osborne emphasized that he wants 'a sign to go up over the British economy that says: “Open for Business”’.
The main rate of corporation tax, currently 28 percent, will fall by one percentage point a year for the next four years. The small companies' tax rate will be cut to 20 percent. From April 2011, the threshold at which employers start to pay National Insurance will rise by the rate of inflation plus £21 (US$31) per week. This is hoped by the government to encourage employment within these small, entrepreneurial businesses.
In his delivery to the House of Commons, Osborne specifically mentioned the tourism industry, maintaining that the overall decrease in taxes imposed on small businesses would be a welcome boost.
The government also revealed it will explore changes to the aviation tax system, such as switching from a per-passenger to a per-plane levy. With consultation ongoing as to exactly how this might work, it is too early to say whether this will mean a subsequent increase in airfares. Measures to readdress the climate change levy to provide more certainty and support to the carbon price are to be published later in the year.
The Labour shadow chancellor, Alistair Darling, warns the cuts will lead to an overall increase in unemployment. Increased numbers of people out of work, potential reduced spending power for those in work and a public sector that isn’t spending money are likely to cause some damage to the domestic hotel and events market. However, whether the cuts will encourage small business expansion and indeed attract investors and visitors to the U.K. is yet to be seen.