Emergency Budget to follow Brown's departure

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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Tax
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Where
will the tax rises fall?