Budget to herald public spending cuts

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Alistair Darling is set to concede that he cannot ignore the mounting debt being built up by the Government, and will slash public spending plans in his Budget on Wednesday.

The Chancellor had already cut back public spending growth for the period 2011-2016 from 1.6 per cent to 1.2 per cent, but will have to make further cuts to help plug a £175bn hole in the public finances.

In an attempt to ward off accusations from the Conservatives that he is raising unsustainable levels of debt, he is keen to show he is "credible in balancing the books". Cuts in spending would not come until 2011, after the next election. "We will need to consolidate the public finances in the medium term," said a Treasury source.

But the Chancellor is unlikely to support more radical steps to raise money, backing away from a plan that would see anyone earning more than £100,000 placed in the 45 per cent income-tax bracket that was announced last November.

Currently, that new top rate is only to affect those earning more than £150,000. If lowered, around 500,000 high earners would be affected.

Ministers were over the weekend preparing the way for tough public spending cuts by admitting that the public did feel uneasy about the level of debt accumulated under Labour.

Lord Mandelson, the Business Secretary, said the public were "undoubtedly concerned about the figures to do with borrowing and spending".

The Tories described this Wednesday's Budget as the "day of reckoning" for the economy and Labour, with George Osborne accusing the Government of wreaking "economic carnage". The shadow Chancellor also claimed that Mr Darling would have to admit that the recession would be the worst since the Second World War.

"We are already [seeing] the fastest rise in unemployment on record, and I think we will see the worst public finances not just in the world but also since the Second World War," he said.

Lord Mandelson accused Mr Osborne of talking down the economy. He is, meanwhile, still pushing the Chancellor to endorse a car scrappage scheme, to pay consumers for their old cars if they are buying a new model. The plan remains on the table, with Mr Darling set to make a last-minute judgement. A Treasury source said the proposal had "potential merits".

Despite the difficulties with the public finances, Mr Darling is determined to show he is "investing in the recovery", and is expected to announce some spending programmes to help Britain move to a low-carbon economy. He is expected to announce a further £500m of funding to boost energy efficiency and renewable energy schemes. It will come in the form of an extension of plans to insulate homes and businesses, as well as a £25m fund to finance community heating projects.

Plans being discussed at the Treasury would see the funding of up to eight pilot schemes involving communities installing solar heaters or biomass technology to heat their homes.

Meanwhile, the Tories have called for an urgent £600m programme to be introduced to prevent an unemployment crisis among those leaving full-time education this summer. They warn that as much as 40 per cent of the growing ranks of the unemployed could be made up of under-25-year-olds, unless the plan is put in place this week by the Chancellor.

David Willets, the Conservatives' shadow skills secretary, said "There is evidence that if young people are left out of the job market now, it can still be having an effect on their careers 20 years from now".