Emergency Budget to follow Brown's departure

George Osborne

The management of the UK economy and the Treasury is set to be transformed after Gordon Brown finally left office yesterday leaving a Conservative-Liberal Democrat coalition to take on the financial crisis.

George Osborne will become chancellor with reports suggesting Lib Dem shadow chancellor Vince Cable will be given responsibility for business and banks. An emergency Budget is to follow within the next 50 days. Some experts expect it next month. There was no confirmation of Cable's title, though it does appear to be one of four cabinet posts that the Lib Dems will occupy.

After being invited by the Queen to become Prime Minister David Cameron announced that Lib Dem leader Nick Clegg will be deputy prime minister with a seat in government.

But with Osborne and Cable on the Treasury team and working on restoring the UK's finances to health, it remains unclear what kind of economic policy the new government will develop. While both parties agree on the need to cut the UK's £166bn budget deficit they differed on the timing. The Tories prefer cuts right away while Cable has articulated concerns that immediate and deep cuts to public spending could endanger the recovery which has seen GDP rise just 0.2% so far.

There are also difference over tax policies. There is some speculation that the Tories have given way to Lid Dem demands for a rise in the personal income tax allowance to £10,000. But there remains no clarity as yet on the Tory policy to raise the inheritance tax threshold (once described by Nick Clegg as a tax cut for millionaires) or the Lib Dem manifesto pledge for a hike in capital gains tax.

One policy that is likely to survive is some form of cut in corporation tax. The Tories have talked of cutting it by three percentage points to 25% - described by Gordon Brown during the General Election campaign as a tax cut for banks.

However, in these difficult times such a reduction would beg the question of how it would be paid for. Previous statements have suggested this would be done through a substantial reworking of the capital allowances regime. The Labour party had always placed much store in these tax allowances for business but the Tories have argued they are too complex and have benefited business very little.

There has also been much speculation on what tax rises would have to follow for the deficit to be affected in any substantial way. Many tax experts believe only a hike in the standard rate of VAT would be the answer. Even a rise of a single percentage point would produce an increase in revenues to the Treasury of up £4bn. There are no other taxes, except income tax and national insurance that can rise such large sums with relatively modest rises in headline rates.

But the true implications are unlikely to be clear until the government holds its emergency Budget, which many believe will be as early as next month.

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