Fast Track Deficit Reduction Measures For The UK and Europe


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The new UK Conservative-Liberal Democratic coalition government has as a priority the task of slashing the massive budget deficit of around ?165 billion. The new alliance has agreed to ?significa

The new UK Conservative-Liberal Democratic coalition government has as a priority the task of slashing the massive budget deficit of around ?165 billion. The new alliance has agreed to ?significantly accelerate? its attack on the deficit. There will have to be the toughest spending cuts for decades and tax increases to achieve this. The wealthier taxpayers will bear the brunt of higher taxes.

An emergency Budget will be delivered on 22nd June. In the run up to the election, none of the three major parties were open about the depth of cuts or tax rises which lay ahead. Immediately following the coalition deal the following had been agreed:

Immediate spending cuts

The new Chancellor of the Exchequer, George Osborne, pledged to begin to reduce the deficit by ?6 billion this year from cutting Whitehall waste. The Liberal Democrats had wanted to delay imposing spending cuts for fear of putting the recovery at risk.

Inheritance tax

During his pre-election campaign, David Cameron, now Britain?s prime minister, had pledged to raise the inheritance tax threshold, currently ?325,000, to ?1 million. This has been dropped, in effect keeping more Britons liable to the 40% inheritance tax rate and robbing the wealthier of a welcome tax break.

Tax-free allowance

The tax-free allowance on income will rise to ?10,000 from ?6,745, at a cost of ?17 billion according to the Institute for Fiscal Studies. The threshold will be increased in stages from April 2011 and will be funded with the savings made by the Conservatives to reverse the National Insurance rise next year.

National Insurance Contributions (NIC)

The 1% rise in NICs for employees earning over ?20,000, which was announced by the previous Labour government, will stay to help pay for the tax free allowance increase.

Capital gains tax

A substantial increase in capital gains tax (CGT) is planned on non-business assets such as second homes, buy-to-let properties, other investments and shares to also help finance the increase in the tax-free allowance. Currently at 18%, the CGT rate could rise to 40% or 50% on the sale of some assets. The current tax-free threshold of ?10,100 per individual on investment income could also be lowered.


Although this wasn?t mentioned most economists feel that VAT will undoubtedly be increased from 17.5% to at least 20%. In other European countries it is higher. An increase to 20% would raise ?12 billion for the economy.

Tax rises already in place from the previous Labour government include a 50% top rate of tax, a bank bonus tax and partial increase in NICs. Other tax increases, including an additional increase in NICs and the withdrawal of pension tax relief for high earners, are due to come into force next year. Stamp duty on property valued at over ?1 million was hiked by 1% to 5%.

According the European Commission, published five days before the Tory-Lib Dem coalition deal, the UK deficit is set to hit 12% of gross domestic product (GDP) this year and by 2011-12 the government debt would be 87% of GDP, twice the amount prior to the financial crisis. Currently the UK deficit at about 11.6% is larger than that of Greece at 9.3%. The EU?s target is 3%.

In addition, Briton has committed its taxpayers to around ?13 billion (?15 billion) worth of support for the Euro in a ?95 billion (?110 billion) ?stabilisation mechanism? by underwriting loans to help European Union countries such as Portugal and Spain facing a debt crisis, and thought to be at risk of contagion from Greece?s financial crisis.

European countries with indebtedness are under pressure to tackle the problem and cut their deficits. Spain and Portugal have made a commitment to “take significant additional consolidation measures in 2010 and 2011.”

Portugal announced an austerity budget in March but on 11th May it added further austerity measures to reduce its 2009 deficit of 9.3% of GDP. The government had already vowed to cut this year's deficit to 7.3%, and has pledged to reduce its deficit to 2.8% by 2013.

The Portuguese parliament approved two tax measures, yet to be definitely adopted by Parliament, including plans to introduce a new 45% tax bracket for those earning over ?150,000, as well as a proposal to levy a 20% tax on stockmarket capital gains. Two days later it was reported that income tax will rise between 1% and 1.5% and VAT will go up 1% to 21%.

Spain also announced a new austerity budget with a 5% pay cut for public workers, a freeze on pensions and by axing investment spending by more than ?6 billion. Spain plans to shrink the deficit from 11.2% to 6% of GDP this year and to 3% in 2013. There has already been an increase in the tax rate on savings income and VAT will rise by 2% to 18% from 1st July 2010.

Before the UK general election, the National Institute for Economic and Social Research (NIESR) said that the next government must raise taxes by 6p in the Pound and freeze tax allowances for the British economy to return to health. “There is no longer any strong evidence that spending cuts are better than tax rises at bringing the deficit down,” said Ray Barrell, director of macroeconomic research at NIESR.

Many economists have commented that taxes will have to rise to reduce Britain?s debt and it will not be down to cuts alone. It will take more than a generation – meaning your children and possibly grandchildren will be paying – before the public finances can be on an even keel.

British expatriates living in countries like Spain and Portugal could well be affected by the economic measures being taken. If you should move back to the UK to live the potential tax increases there will impact on your disposable income and wealth, leaving you with less to spend on your own comfort and to pass on to your family. A wealth and tax adviser like Blevins Franks can help you to plan ahead and arrange your finances in legitimate tax reducing structures, whether you remain in Spain/Portugal or return to the UK.

By Bill Blevins, Managing Director, Blevins Franks

14th May 2010

Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; individuals should seek personalised advice.