Shock Capital Gains Tax rise angers hardline Conservatives

David Cameron is set to anger Tory traditionalists by approving a big rise in capital gains tax (CGT) to close a bigger-than-expected "black hole" in the public finances.

A "top-to-bottom" audit of public spending will be launched by the coalition government today by a new independent Office of Budgetary Responsibility, headed by Sir Alan Budd, a former Treasury chief economic adviser. It will shape the emergency Budget expected next month.

Mr Cameron appears ready to bow to pressure from his Liberal Democrat partners for CGT on the sale of shares and second homes to be raised from 18 to 40 per cent. Although there would be generous exemptions for entrepreneurs, the move will worry some Tory MPs, who fear it will alienate the party's natural supporters.

The Prime Minister told the BBC's Andrew Marr Show yesterday: "When you have a capital gains tax rate of 18 per cent and a top rate of income tax at 50 per cent, you'll find people finding all sorts of ways to treat income as capital gains. Now what we've said is there is a very big difference between the capital gains that someone pays on, say, a second home – which is not, you know, necessarily a splendid investment for the whole economy – there's a difference between that and actual investment in business assets."

He said the proposal was part of a "fairness agenda" that would help the Government's goal of lifting tax allowances to take more people out of tax – a flagship Liberal Democratic manifesto pledge. " I think people will understand," he added.

The Liberal Democrats hope the CGT shake-up will be included in the first Budget. But George Osborne, the Chancellor, thinks more work is needed and has asked for more options to be drawn up.

The Treasury said: "There are a range of possible options on CGT to fulfil this aim and no decision has yet been taken on one option. It will be important to take the time to get this right."

Yesterday, Mr Cameron said the Government had "no plans" to raise VAT, despite growing speculation among economic experts that it will go up from 17.5 to 20 per cent. But a final decision could depend on the report of the nation's books by Sir Alan's team.

There are growing signs that ministers in the coalition want to "bite the bullet" by implementing big cuts as soon as possible in the hope that they can be blamed on their inheritance from Labour. Yesterday, several Tory and Liberal Democrat ministers complained that outgoing Labour ministers had deliberately left behind "poison pills" and "stink bombs" by rushing through big spending commitments just before this month's election.

The new administration will halt some of Labour's decisions, but others may prove too expensive to unravel. Yesterday, David Cameron announced a curb on generous bonus payments for 4,200 senior civil servants and 1,100 senior NHS managers. They will be restricted to the top 25 per cent of performers, so 1,700 Whitehall officials and 450 NHS managers will no longer receive bonuses, saving about £15m.

The average bonus for a top civil servant was £12,700 last year. Some 2,933 officials and 850 health managers received extra payments totalling £35m.

In another clampdown, the left-of-centre economics commentator Will Hutton will advise ministers how to implement plans to ensure that no one at the top of a public-sector body earns more than 20 times its lowest-paid person. This is a sign that Mr Cameron will recruit so-called "goats" from outside Tory circles to create a "government of all the talents".

Ministers claimed they had already found "black holes" in the budgets left them by Labour. The projects said to be causing alarm include a £13bn tanker aircraft programme for the Ministry of Defence, a £1.2bn immigration service IT project, and school building contracts worth £420m.

'Goats' in the machine

*WILL HUTTON

Left-of-centre economics commentator, executive vice-chairman of the Work Foundation think tank. Will head a "fair pay" review to implement Tory pledge to ensure no senior manager in public sector earns more than 20 times the lowest-paid person in the organisation. Former BBC economics correspondent and editor-in-chief of The Observer.



FRANK FIELD

Veteran Labour MP for Birkenhead in talks with Government about becoming an adviser on poverty. Free-thinking reformer; unhappy year as Welfare Reform Minister in 1997. Labour said his ideas were unworkable. May get a chance to put them into practice with Iain Duncan Smith, Work and Pensions Secretary. Favours tough line on immigration.



LORD BROWNE OF MADINGLEY

Former chief executive of oil giant BP. Crossbench peer heading review into university finance. Tipped for Whitehall role overseeing drive to cut waste. Could be "super-director" to push through spending cuts and higher productivity.

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