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Britain's new coalition government faces its first big test on Tuesday when finance minister George Osborne delivers what is likely to be the tightest budget in at least 30 years.Markets, already rattled by the spread of the Greek debt crisis, want to see urgent action to cut a record deficit of 11 percent of GDP and rating agencies have warned Britain's triple-A credit rating may even be at risk if Osborne's plans are found wanting.Both the Conservatives and the smaller Liberal Democrats are united on the need to cut the deficit but differences have already emerged between the centre-right and centre-left partners on how and where the axe should fall.Speculation is rising that VAT sales tax will go up to 20 percent from the current 17.5 percent. Osborne has also said he will introduce a tax on banks to help recoup the costs of the credit crisis, but there is a possibility the headline rate of corporate tax will fall.Treasury sources say the budget will have two main themes. The first is being honest about the size of the problem and a second more optimistic one about it being a starting point for unleashing a wave of private sector enterprise and growth.The scale of the challenge certainly is enormous. The previous Labour government's plans implied more savage cuts than even the Thatcher Conservative administration enacted in the early 1980s. The coalition has promised to go faster than that."Next week's budget announcement looks likely to set in motion 100 billion pounds of fiscal austerity measures. Growth will inevitably suffer," said James Knightley, senior economist at ING.Osborne has said the tightening should be split 80-20 between expenditure cuts and tax rises. He will announce the overall spending envelope but a departmental breakdown won't be available until probably late October.Given certain departments like health will be spared the scythe, others could see their budgets slashed by as much as 20 percent, raising the risk of a collision course with public sector unions and a wave of strikes later in the year.VAT'S UP?The administration has repeatedly refused to rule out a rise in VAT and many analysts predict a jump to 20 percent from the current 17.5 percent, bringing in some 11 billion extra pounds could be one of the biggest measures in the budget.More controversial are plans to raise capital gains tax from 18 percent to something closer to 40 percent. This was a Liberal Democrat policy which has greatly angered many Conservative backbench MPs and large parts of the right-wing press.A bank levy is also on the cards. In opposition, Osborne said he expected this would raise around 1 billion pounds but the Liberal Democrats favour a much bigger tax of perhaps 4 to 5 billion pounds.Drinkers and smokers are also likely to be hit hard with more tax rises and analysts are predicting a rise in so-called "green taxes" to help protect the environment.There has also been much speculation about whether Osborne will go ahead and cut the headline rate of corporation tax from 28 percent. Reducing it to 25 percent had been a Conservative pledge and paying for it by getting rid of some reliefs had been a Conservative pre-election promise.But the Lib Dems are unhappy with scrapping the reliefs and the promise has been downgraded to an aspiration. Still, Osborne may find some room to come down, particularly if he wants to ram home the message of unleashing private sector potential.
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