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George Osborne today imposed austerity measures on every family in Britain as he announced a £40bn package of emergency tax increases, welfare cuts and Whitehall spending restraint designed to slash the budget deficit by the end of the parliament.
The chancellor said the "unavoidable budget" required a VAT rise from 17.5% to 20% next January, higher capital gains tax, a levy on banks, a two-year public sector pay freeze and less generous benefits, but insisted the package was needed to prevent the financial markets from turning on Britain.
In his debut budget speech, Osborne pleased the ratings agencies and the Organisation for Economic Co-operation and Development by intensifying the £73bn squeeze already planned by the last Labour government. But he signalled a second dose of gloom in October, when a three-year comprehensive spending review will spell out the size of the cuts for individual government departments.
Osborne warned today that ring-fencing the NHS and international development meant non-protected departments would face average real cuts of 25% but that some clemency would be shown to education and defence. The chancellor avoided even deeper cuts in Whitehall by earmarking the welfare budget for more than a third – £11bn – of the £32bn reduction in spending. Child benefit will be frozen, and the government will eventually save almost £6bn a year by linking all state benefits other than pensions to the slower-growing consumer prices index rather than the retail prices index. The Treasury will raise more than £12bn from the increase in VAT, but the chancellor sought to soften the blow from the toughest budget in modern times by raising personal allowances by £1,000, linking pensions to earnings and raising child credits for the next two years. He said a four-year phased cut in corporation tax would help the private sector become the engine of growth, and the economy would have to rely more heavily on investment and exports over the coming years.