The Budget: A tough Budget spreads the pain: Shares soar as Clarke pledges to end borrowing by raising taxes and trimming spending

THE CHANCELLOR yesterday imposed tax increases and public spending cuts that will build up to an extra pounds 10.5bn a year in three years as he tries to balance the Government's books by the end of the decade.

Kenneth Clarke's unexpectedly tough Budget will gradually increase the tax burden on the home-owning middle classes, but shares soared as the City concluded that the Chancellor would have to cut interest rates again before Christmas to keep the recovery on track.

Mr Clarke's measures were greeted with genuine relief by all parts of the Conservative Party, and economists said that the effort to cut the deficit today could pave the way for tax cuts before the next general election.

Mr Clarke said the size of the shortfall between tax revenue and spending threatened the recovery. 'The overriding need is to place the public finances on a sound footing. That is the immediate task of the Government and the main theme of my Budget.'

The tax measures will raise pounds 1.7bn in the next financial year - broadly the same as a penny on income tax - on top of the pounds 6.7bn put in place by Norman Lamont in March when he imposed VAT on fuel and raised employees' National Insurance contributions.

Mr Clarke's tax increases will raise an additional pounds 6bn a year by 1995-96. This year's two Budgets - Mr Lamont's in March and now Mr Clarke's - amount to the most severe tightening of the tax screw since the 1981 Budget.

The Chancellor also announced unexpectedly big cuts in public spending plans and a sweeping reform of social security which is likely to remove as many as 200,000 people from the official unemployment count.

Next year's planning total for public spending - excluding items like jobless benefit that rises and falls with the state of the economy - was cut by pounds 3.6bn to pounds 251.3bn, delighting City hawks. Local councils will be particularly hard hit.

Mr Clarke also moved to head off political opposition to VAT on fuel with measures to compensate pensioners, the disabled and poorer families. The package will cost pounds 400m next year and more later, but may not fully compensate pensioners for higher bills.

The Chancellor predicted that the economy would grow by 2.5 per cent next year, below the forecast of his 'seven wise men', suggesting some nervousness that the tough Budget could slow the recovery. He was also slightly more pessimistic than his advisers about inflation.

Next year's tax increases in what is a slow burn Budget include the raising of pounds 550m by freezing personal tax allowances - income on which tax does not have to be paid. Immediate revenue raisers include an increase of 3p a litre in petrol duties and 11p on a packet of 20 cigarettes. Beer and sprits duties are unchanged.

In a surprise move which avoided extending Value Added Tax to politically contentious items such as children's clothes or newspapers, the Chancellor announced a new 3 per cent tax on insurance premiums, and a tax on passengers passing through airports. He said measures to combat tax avoidance would raise pounds 580m.

The rise in the tax take in 1995-96 is due to a cut in tax relief on mortgage interest payments, costing homeowners with a pounds 30,000 mortgage pounds 10 a month. The married couple's tax allowance will also be cut.

The Institute of Fiscal Studies said that Mr Clarke's Budget added to the pain inflicted on above-average earners by his predecessor, and limited the losses of the poorest third of income earners. The average household would be pounds 4.60 a week worse off than they were before this year's Budgets.

Most spending departments suffered cuts after taking account of inflation. Defence, trade and industry, transport and local authorities suffered, with cuts concentrated in areas where a squeeze on public sector pay might save services from being curtailed.

Investment has been hit hard, particularly in housing and transport. Capital spending is expected to fall by more than pounds 2bn next year to pounds 11.75bn. The Treasury said further encouragement for private finance of public sector capital projects would help offset this.

However, education was a big winner. Spending will rise by 6.8 per cent next year to pounds 10.5bn. But student grants will be cut by 10 per cent next year in a further gradual shift towards a continental-style system of student loans.

Health was another winner, with spending planned to rise by 1.5 per cent on top of inflation next year, to pounds 29.5bn in 1993-94 prices.

The Chancellor announced a range of changes to social security. They tighten regulations for social security recipients and pass some costs to business.

A Jobseekers' Allowance will replace unemployment benefit and mask a halving from 12 to 6 months in the period for which unemployed people receive benefits without means testing. This is likely to hit unemployed women with working husbands particularly hard. If they cannot find jobs and cannot claim benefit, the effect could be to cut the unemployment total. People on Family Credit will receive up to pounds 28 a week for childcare.

A further encouragement for low-paid employment came via cuts in the employers' national insurance contributions. This will cost more than pounds 800m next year, paid for in part by transferring the pounds 700m bill for statutory sick pay to firms.

Invalidity benefit and sickness benefit are to be amalgamated into Incapacity benefit. This will involve a tighter medical test, for example arguing that more wheelchair users should be able to get office jobs.

The Chancellor also announced that the age at which women are entitled to the state pension would be increased from 60 to 65, phased in between 2010 and 2020.

(Photograph omitted)