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Rock and Hard Place

"Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery." What would Wilkins Micawber have made of an annual deficit not of six (old) pence but £155Bn?

Faced with such a problem, the easy way out for the Chancellor would have been to impose large increases in taxes. He has not been seduced into doing that, perhaps having been advised that there is a point at which high tax rates become counterproductive as tending to encourage avoidance and other behavioural changes. On the contrary the budgetary gap will be closed mainly by reduction in government expenditure, some of which are already proving very controversial. But the rises in taxation (at least, in direct taxation) are relatively modest and to that extent, the Chancellor's budget must be considered good for business.

Looking at specifics, the most high-profile change is a rise in VAT to 20% from 4 January 2011. However, thankfully, there is no suggestion of any change to the treatment of zero- or reduced-rated supplies, nor to the cash or annual accounting schemes. So – an unwelcome change for consumers and for VAT-exempt businesses but for others a mixed blessing – it may trigger a six-month mini-boom for retailers as consumers bring forward big-ticket purchases but it may be followed by a fall-back in demand as prices rise in the New Year.

The increase in CGT was heavily trailed and is nothing like as bad as it could have been. At 28%, the rate is only slightly higher than the lowest non-business rate (24%) which applied in the days of taper relief - which rate was earned only after ten years' ownership - and the unexpected increase to £5m in the Entrepreneurs' Relief lifetime limit sweetens the pill. We suspect that the rate is carefully set at the level which maximises the tax yield without killing the goose that lays the golden egg: thus avoiding the mistake which the previous government is widely considered to have made with the 50% Income Tax rate.

Corporate tax rates come down, with the small companies' rate dropping to 20% from 1 April 2011 and the main rate dropping in stages to 24% by 1 April 2014. To some extent this is balanced by reductions in the rate at which capital allowances are due, with the main rate of writing-down allowance reduced to 18% and annual investment allowance (which was increased only in May to £100,000) slashed to £25,000. We may be Luddites, but it has always seemed to us odd that in a time when unemployment is a live issue, tax law has provided an incentive to buy labour-saving machinery but (via NIC) a positive disincentive to employ people: the reduction in capital allowances and the increase in the employers NIC threshold (of £21 per week above inflation) represents some small movement in the other direction.

But perhaps the most refreshing aspect of the Budget is that after many years of "smoke and mirrors" Budgets characterised by complexity and obfuscation, this is a clear WYSIWYG statement. Whether you like what you see is another matter: the view that a benefit claimant or a public servant will be taking on the Budget will be very different from that which is taken by a businessman or -woman. We live in interesting times.