This is among a number of occasional commentaries about macro-economic and tax issues from wealth management specialists. This week, the UK government – a Conservative/Liberal Democrat coalition – announced a mix of tax increases and spending cuts designed to close a huge public deficit and hence protect the country’s AAA sovereign debt rating. These are comments from Jeremy Beckwith, chief investment officer at Kleinwort Benson.

"At first sight, the Chancellor [George Osborne] has adroitly managed to satisfy both halves of the governing coalition. To the right (and the financial markets) he has delivered a credible budget deficit reduction package that leaves a balanced budget by the end of the Parliament, with only one significant tax increase – VAT rising to the European average of 20 per cent - a smaller than expected increase in Capital Gains Tax, and a planned reduction in the scope of the welfare system. To the left he reinstates the earnings link to pensioners, and takes almost a million earners out of the income tax net completely. To the tax purists he has also achieved an alignment of the income tax and national insurance systems by co-ordinating the thresholds.

These are all notable achievements for a first budget. However, the pain that was delivered by this budget is akin to that of the anaesthetic – it is merely the framework of government spending and budget deficits that flow from the planned levels of spending.

The real pain will be felt on 20 October – the date of the Spending Review announcement.  The Chancellor acknowledged that the previous government’s plans amounted to a 20 per cent reduction in the departmental budgets in non-protected areas such as health and education.  

"For this government only health and overseas aid are protected from spending cuts, which means that with the extra spending cuts announced yesterday the reduction in departmental budgets now rises to 25 per cent over the life of this Parliament.  This will be brutal surgery."