The UK budget as a blueprint?

Today the Chancellor of the Exchequer announced his special budget for the UK.  Overall, the plan is to reduce the government’s deficit from STG 149 billion to STG 20 billion over a 4 year period.  In percentage from 10.1% of GDP to 1.1% of GDP. 

The cuts are severe, and actually are somewhat similar to what Canada did in the mid 90s, with one big difference, for Britain this will be actual spending costs, in Canada the expenses were effectively shifted from the central government to the provincial ones.

Bottom line a 25% reduction in government expenditure in all but two departments:  healthcare and foreign aid.  Also increases in taxes:

• Capital gains tax rise by 10% to 28% (with a STG 5 million lifetime exemption)
• VAT rise of 2.5% to 20%
• Corporate tax down from 28% to 24%, but dramatic reduction in exemptions
• Bank tax

The impact on the economy will be mixed, the reduction in corporate taxes will be balanced out by an important reduction in certain deduction, so the impact of the cut is less obvious then it first appears.  However, there is no doubt that at the headline level; the UK budget is a carbon copy of what the Canadian government did in 1995 (aside from the bank tax – all though a Capital tax was introduced at that time for all companies in Canada).

Worrying is the bank tax, which can be seen as a “piggy bank” by various governments – France and Germany appear poised to imitated the UK government.  On the other hand many of these financial institutions benefit form implicit government guarantees.

The Chancellor anticipates that GDP growth in 2011 will be below 1.5%, so the government is bracing for the worse.