Darling's strategy for power: divide and rule

Wealthy to fund stamp-duty boost for first-time buyers while inheritance tax freeze is designed to portray Tories as 'party of the rich'

The Institute for Fiscal Studies said that Whitehall departments would have to find savings of £25 billion over the next two years, rising to £46 billion by 2014-15, to make Chancellor Alistair Darling's Budget calculations add up. (REUTERS)

Alistair Darling drew the battle lines for a 6 May general election yesterday when he announced a "fair tax" package in which higher stamp duty for people who buy homes worth £1m will help first-time buyers to get on to the property ladder.

The Chancellor used his Budget to raise stamp duty on homes costing £1m from 4 to 5 per cent, adding £10,000 to the cost of such a property. The proceeds will finance the abolition for two years of stamp duty on a flat or house costing less than £250,000 for first-time buyers. Nine out of 10 of them will now enjoy a stamp duty "holiday". Last night, the Tories said they would not reverse the changes if they win power.

Although Labour MPs cheered the move, many were disappointed that Mr Darling shied away from the populist "Robin Hood tax" on banks that pressure groups had demanded. The Chancellor froze inheritance tax at £325,000 for the next four years – a deliberate contrast with the Tories' flagship pledge to raise it to £1m.

His pre-election Budget paved the way for Labour to issue a hard-hitting warning at the election that the Tories would raise VAT from 17.5 to 20 per cent if they win power. One senior Labour figure told The Independent: "We have not raised VAT even in tough times. The only party with a consistent record of raising it is the Tories. If they get in, they will do so again."

The move creates a headache for the Conservatives, who say they have no plans to increase VAT but are unlikely to rule out the option. Last night, the Opposition hit back on taxation, accusing Mr Darling of smuggling out a £2.2bn "stealth tax" for 30 million people by freezing tax allowances without even mentioning it in his 58-minute speech. The Tories said a basic rate taxpayer would be £48 a year worse off, and higher rate taxpayers would lose more.

"That tells you everything you need to know about Labour's cynical tricks and its priorities," said the shadow Chancellor, George Osborne. "The bill for Gordon Brown's economic mistakes is going to be paid by every working family in Britain."

The Tories also accused Mr Darling of a sleight of hand after Whitehall departments issued a list of £11bn of efficiency savings that did not feature in his speech. The Opposition claimed this left a gap of £27bn of unidentified spending cuts in Labour's proposals. Labour put the sum at £18bn, saying the cuts would be found in a spending review this autumn.

In a low-key, neutral Budget, Mr Darling sought to avoid a hostile reaction in the City by using lower than expected borrowing of £167bn in the current financial year to reduce the huge public finances deficit. He trumpeted a one-off, £2.5bn "growth package" to secure economic recovery, with measures to help small firms, create jobs, boost infrastructure projects and create an extra 20,000 university places.

The only giveaway was to phase in over nine months the 3p-a-litre rise in fuel duty due to take effect in April. It will now rise by 1p before the election. There was no such cheer for smokers or drinkers, with 15p added to a packet of cigarettes, 36p on a bottle of whisky, 10p on a bottle of wine, 2p on a pint of beer and a punitive £2 on a bottle of super-strength cider in an attempt to combat antisocial behaviour.

Mr Darling drew another election dividing line as he claimed Labour's "active government" approach had prevented the recession from turning into depression. "We didn't get through this by chance," he said.

Although cabinet ministers admit privately that voters are unlikely to say "thank you", they hope the public will get Labour's message that a Tory government promising to cut spending immediately would not nurture the recovery, putting jobs at risk.

But the Conservative leader, David Cameron, said: "Labour has made a complete mess of the British economy and they are doing nothing to clean it up ... Like every Labour government before it, it has run out of money and has left it to the next Conservative government to clean up the mess. It's time to sack the manager."

The Tories seized on measures in the small print of the Budget documents, warning that Britain's contributions to the European Union would double from £3bn in 2008-09 to £6.6bn in 2010-11. They warned that borrowing could be £10bn higher if the economy grew in line with the forecasts of independent analysts, rather than the Chancellor's more optimistic prediction of 3 to 3.5 per cent in 2011.

Nick Clegg, the Liberal Democrat leader, said: "This was a political dodge not an economic plan. Britain needed a Budget that gave us honesty in spending and fairness in tax; we have got neither. By confirming a freeze in personal allowances, the Government has ensured everyone will see a real increase in their income tax bill – when what people on low and middle incomes desperately need is an income tax cut."

There was criticism from business leaders and the City about the absence of detailed spending cuts. Richard Lambert, the director general of the Confederation of British Industry, said: "With the election just weeks away, this was a clever, political Budget. However, anxiety remains on how the deficit is going to be paid down, and the growth forecasts for 2011 and beyond are still on the optimistic side."

Michael Saunders, of Citigroup, said: "With no credible fiscal tightening in place, the UK will likely go into the election with major medium-term fiscal uncertainties." Gerard Lyons, at Standard Chartered, described it as "a do-nothing Budget that had shades of Nero about it". Thomas Schultz-Jagow, campaigns director at Oxfam, said: "The proposal for a global bank tax falls well short of a Robin Hood tax on financial transactions that would raise the hundreds of billions needed to help poor people at home and abroad ... and to tackle climate change.

"The Chancellor's opposition to a unilateral bank tax is plain wrong. Robin Hood gathered his merry men by leading from the front, not by waiting for global agreement."

Heard this one before?: The borrowed Budget

Duty on cider up by 10 per cent above inflation

Chris Grayling, the shadow Home Secretary, said last October that a Tory government would put up to £1.50 on a bottle of super-strength beer or cider.

Stamp duty scrapped for homes below £250,000 for first-time buyers, raised on homes over £1m to 5%

George Osborne revealed an identical plan to raise the stamp duty threshold in 2007, while the Liberal Democrats announced a "mansion tax" last year.

20,000 new university places

David Willetts, the shadow Universities and Skills Secretary, already pledged to fund an extra 10,000 university places.

A £2bn "green investment bank" to foster low-carbon industries

Both Tories and Liberal Democrats claim to have a similar plan.

Budget at a glance

Economy Contracted 6 per cent in recession. Forecast growth of 1-1.25 per cent in 2010. Growth forecast for 2011 cut to 3-3.5 per cent from 3.5 per cent.

Borrowing Forecast to be £167bn this year, £11bn less than predicted in December. To fall to £163bn in 2010-11 and £74bn by 2014-15. Net public debt to hit 54 per cent of GDP this year, increasing to 75 per cent by 2014-15.

Inheritance tax Thresholds frozen for four years.

Top earners Tax allowances for those earning more than £100,000 gradually removed.

Alcohol 'Sin tax' on cider sees duty rising by 10 per cent above inflation on 29 March. Beer, wine and spirits up by 2 per cent above inflation.

Tobacco Duty on cigarettes up 1 per cent above inflation adding 15p a packet. Rates will increase by 2 per cent above inflation for a further two years.

Petrol Planned 3p rise in fuel duty to be phased in three stages between April and January 2011.

House-buying Stamp duty scrapped on homes under £250,000 for first-time buyers. Raised to 5 per cent on homes over £1m.

Savings ISA tax-free limits to rise to £10,200 from £7,200 next month.

Whitehall cuts 'On track' to achieve £11bn efficiency savings.

Tax avoidance Package of measures to save £1.6bn.

Education Funding for 20,000 university places in science, maths.

Pensioners Winter fuel allowance rates extended for a year.

Children £4 rise in tax credit for parents of young children from 2012

Business Package of £2.5bn for small business to boost skills, innovation. One-year business rate cut from October to help 500,000 firms.

Environment £2bn investment bank for green energy.

Banks Bonus tax raises £2bn, more than treble forecast amounts. Guaranteed right to basic bank account.