In keeping with its promise to deliver an emergency budget within 50 days of coming to office, the UK’s Conservative-Liberal Democrat coalition government today unveiled a painful package of fiscal reforms to get public finances back on an even keel. Delivered by Chancellor of the Exchequer George Osborne before parliament, the budget proved to be particularly radical, but largely expected.

Lambasting fiscal profligacy at the hands of the previous Labour government, Osborne stressed the necessity of the budget to maintain foreign investor confidence and the need to spread the burden evenly. In addition, citing empirical research that fiscal consolidations focused on spending cuts were more successful and beneficial for growth, the Chancellor informed parliament that the budget will focus on budget cuts over tax increases in ratio of 77:23.

The government used today’s budget speech to highlight the forecasts from the recently inaugurated interim Office for Budget Responsibility (iOBR), which now handles the fiscal and economic projections which will be used in formulating specific policies. In particular, public sector net borrowing (PSNB) is forecast to retrench to £20bn (1.1% of GDP) in 2015 from £149bn (10.1% of GDP) in 2010, while the structural budget will be balanced by 2016. The iOBR, which is also mandated to assess the government’s ability to satisfy explicit targets, stated that the Tory-Lib Dem alliance is on track and will meet its objectives of a balanced budget one year ahead of schedule.

Below I highlight some of the main features of the emergency budget.

• Public sector wages will be frozen for two years. Those earning under £21,000 (1.7mn workers, 28% of the public sector workforce) will be protected. All workers will receive a flat £250 increase in 2010 and 2011, which will have a higher proportional impact on lower earners.
• Increase the state pension age to 66.
• Abolish Health Pregnancy Grant.
• Child benefit will be frozen for three years.
• Medical assessments will be required for new and existing claimants of the Disability Living Allowance (DLA).
• Housing benefits will be curtailed.
• The corporate tax rate will fall to 24% from 28% over four years, with Osborne triumphantly declaring “Britain is open for business”.
• Firms outside of London which employ at least 10 workers will be exempt from up to £5,000 in national insurance contributions.
• As expected, value added tax (VAT) will be raised to 20.0% from 17.5%. This proved the most contentious proposal in parliament, with the sudden uproar forcing the Chancellor to stand down for the only time during his speech.
• Food, children’s clothing and books will still be exempt from VAT.
• No changes to duties on alcohol, tobacco and fuel have been proposed.
• Labour’s decision to increase cider tax by 10% has been reversed, delighting West Country voters.
• For higher earners, capital gains tax (CGT) will rise from 18% to 28% as of midnight tonight, with the CGT allowance remaining at £10,100.
• For the under 65s, the taxable allowance on income will rise from £6,475 to £7,475 in April.
• For local authorities that can keep spending growth under control, the government will help them to freeze council tax.
• A new levy will be imposed on banks which is expected to raise £2bn from 2011 and will partly offset the benefit of lower corporation tax.
• From April 2011, basic state pensions will be re-linked to earnings.
• In April 2011, the child element of the Child Tax Credit will increase by £150 above CPI indexation and by £60 above indexation in April 2012.

Labour’s response to these measures proved particularly scathing, with acting leader Harriet Harman proclaiming the budget was “reckless” and would not spread the burden of adjustment fairly, falling on the old adage “same old Tories”. However, Harman did indicate that the Labour Party will support the hike in CGT, bank levy and personal allowance increase.

On the whole Risk Watchdog thinks it was a fairly extensive budget that will help restore the health of the UK’s public finances. While acknowledging the need to limit the dependence on debt-fuelled consumption and rebalancing the economy more towards exports, BMI is still wary of the proposed VAT increase which could hit the pockets of the many consumers who travel from across the world to spend money in British shops. It remains to be seen whether the government can credibly commit to this program, though one thing is for sure: public protests and worker strikes are looming on the horizon.