Tax rich now – and the rest of us later

National insurance rate up, 40p tax threshold frozen; Cap on pay rises for five million public-sector workers

Alistair Darling yesterday revealed the painful tax rises and spending cuts needed to cure Britain's economic sickness after the recession but told voters they would not have to swallow the medicine until after next year's general election.

In his pre-Budget report, the Chancellor doubled to 1 per cent the 0.5 per cent rise in national insurance contributions already due to take effect in April 2011. This would hit 10 million people earning more than £20,000 a year. He risked alienating middle-income groups further by freezing the threshold at which the 40p income band starts in 2012, sucking more people into this rate, which currently bites on incomes above £41,000 a year.

Mr Darling announced that pay rises for about five million public sector workers would be capped at 1 per cent for two years from 2011. Trade unions said this would amount to a cut because of inflation and warned that it could provoke industrial action.

The grim inheritance for whoever wins the election was balanced by a pledge to protect spending on schools, and hospitals and to maintain police numbers. Mr Darling admitted there would be real and difficult cuts in other areas but refused to provide much detail, other than a downpayment of £5bn of savings. Again, a government-wide spending review was deferred until after the election.

The Chancellor confirmed plans for a one-off supertax on bankers' bonuses. Although expected to raise £500m, the main aim is to deter banks from paying them in the first place. It will apply to the amount of a discretionary bonus over £25,000 but not to bonuses guaranteed in bankers' contracts. The 50 per cent tax will be levied on banks rather than individual bankers. So £10,000 of a £35,000 bonus would be taxed, netting the Treasury £5,000.

Mr Darling went ahead with a £31bn rise in public spending next year, arguing that the immediate cuts favoured by the Tories would put at risk the recovery that would start in the last three months of this year. "The choice facing the country is between securing recovery or wrecking it," he told the Commons. "Between investment to build a fair society where all prosper and a divided society that favours the wealthy few."

To highlight the divide between the two main parties, the Chancellor shelved his plan to raise the threshold on inheritance tax from £325,000 to £350,000. The Conservatives have pledged to raise it to £1m. Last night the Tories warned that the further hike in national insurance would hit "the many, not the few" – the jibe Labour throws at them over their planned inheritance tax cuts.

George Osborne, the shadow Chancellor, said: "Now we know what Labour's class war means – a tax on anyone earning over £20,000. This is Labour's tax on jobs at the worst possible time. Our priority must be to stop Labour tax rises on the millions of working people on average earnings."

Treasury figures show that someone on £30,000 a year would be £90 a year worse off as a result of the national insurance rise, while someone on £100,000 would lose £520.

Bosses condemned the rise in national insurance, which applies to employers as well as employees. Richard Lambert, the CBI director general, said: "The Chancellor has made a serious mistake imposing an extra jobs tax at a time when the economic recovery will still be fragile.

The rise in national insurance was the main surprise in yesterday's package. Treasury officials admitted the balance between spending cuts and tax rises in the effort to reduce the deficit had shifted towards higher taxes. Previous plans assumed that about 75 per cent would be found from spending cuts and 25 per cent from tax rises. That has now changed to a two-thirds, one-third split.

But a sign of the squeeze to come emerged in plans to cut £600m from university and scientific research; £360m cuts in the criminal justice system; a £340m squeeze on regeneration and housing and a £500m reduction in IT projects. A scheme to allow 11 million workers not in company schemes to take open low-cost personal pension accounts will be phased in more slowly, saving £1.6bn by 2014-15.

The Institute for Fiscal Studies said Mr Darling had increased spending by £15bn between 2011 and 2013 while recouping less than £9bn through new tax increases. Protecting schools, hospitals and the police would leave services such as housing, transport and higher education facing "severe real cuts."

The institute said the Treasury would not finish the fiscal repair job until 2017–18, requiring further tax increases and spending cuts of £27bn a year by then. Mr Darling raised his £175bn estimate for the deficit in the public finances this year to £178bn but insisted that it would be halved in four years.

But some City analysts warned his prediction that the economy would grow by between 1 and 1.5 per cent next year and 3.5 per cent in 2011 might prove optimistic. Roger Bootle, economic adviser to Deloitte, said: "If, as I suspect, growth turns out to be much weaker, then the borrowing numbers will be much higher.

"The all-important announcements will come after the election, whoever wins it. This has been the Phoney Budget Report."

It could be worse... Ireland's swingeing cuts

Swingeing cuts to public-sector pay, and child and unemployment benefit were announced by the Irish government yesterday as part of emergency measures to cut spending by €4bn.

In his third budget in little over a year the Irish Minister for Finance Brian Lenihan said the measures were necessary to cut debt levels and restore the government's finances.

Mr Lenihan forecast that the Irish economy would shrink by 1.25 per cent next year after a 7.5 per cent contraction this year. He said €1bn will be cut from the public services bill. Public workers' pay will be cut by as much as 10 per cent. Some welfare payments and child benefit will fall by €16 a month. But excise duty on beer will fall by 12c, spirits 14c and wine 60c to entice shoppers to spend more.

David McKittrick

Start your day with The Independent, sign up for daily news emails
Voices
Barn owls are among species that could be affected
charity appeal
News
Sarah Silverman (middle) with sister Reform Rabbi Susan Silverman (right) and sister actress Laura Silverman (left) at Jerusalem's Western Wall for feminist Hanuka candle-lighting ceremony
peopleControversial comedian stages pro-equality Hanukkah lighting during a protest at Jerusalem's Wailing Wall
Arts and Entertainment
The Bach Choir has been crowned the inaugural winner of Sky Arts’ show The Great Culture Quiz
arts + ents140-year-old choir declared winner of Sky Arts' 'The Great Culture Quiz'
Sport
After another poor series in Sri Lanka, Alastair Cook claimed all players go through a lean period
cricketEoin Morgan reportedly to take over ODI captaincy
PROMOTED VIDEO
Have you tried new the Independent Digital Edition apps?
ebooks
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs General

Recruitment Genius: Finance Director

£65000 - £80000 per annum: Recruitment Genius: Finance Director required to jo...

Recruitment Genius: Medico-Legal Assistant

£15000 - £25000 per annum: Recruitment Genius: This is a unique opportunity fo...

Ashdown Group: (PHP / Python) - Global Media firm

£50000 per annum + 26 days holiday,pension: Ashdown Group: A highly successful...

The Jenrick Group: Quality Inspector

£27000 per annum + pension + holidays: The Jenrick Group: A Quality Technician...

Day In a Page

Homeless Veterans appeal: 'You look for someone who's an inspiration and try to be like them'

Homeless Veterans appeal

In 2010, Sgt Gary Jamieson stepped on an IED in Afghanistan and lost his legs and an arm. He reveals what, and who, helped him to make a remarkable recovery
Could cannabis oil reverse the effects of cancer?

Could cannabis oil reverse effects of cancer?

As a film following six patients receiving the controversial treatment is released, Kate Hilpern uncovers a very slippery issue
The Interview movie review: You can't see Seth Rogen and James Franco's Kim Jong Un assassination film, but you can read about it here

The Interview movie review

You can't see Seth Rogen and James Franco's Kim Jong Un assassination film, but you can read about it here
Serial mania has propelled podcasts into the cultural mainstream

How podcasts became mainstream

People have consumed gripping armchair investigation Serial with a relish typically reserved for box-set binges
Jesus Christ has become an unlikely pin-up for hipster marketing companies

Jesus Christ has become an unlikely pin-up

Kevin Lee Light, aka "Jesus", is the newest client of creative agency Mother while rival agency Anomaly has launched Sexy Jesus, depicting the Messiah in a series of Athena-style poses
Rosetta space mission voted most important scientific breakthrough of 2014

A memorable year for science – if not for mice

The most important scientific breakthroughs of 2014
Christmas cocktails to make you merry: From eggnog to Brown Betty and Rum Bumpo

Christmas cocktails to make you merry

Mulled wine is an essential seasonal treat. But now drinkers are rediscovering other traditional festive tipples. Angela Clutton raises a glass to Christmas cocktails
5 best activity trackers

Fitness technology: 5 best activity trackers

Up the ante in your regimen and change the habits of a lifetime with this wearable tech
Paul Scholes column: It's a little-known fact, but I have played one of the seven dwarves

Paul Scholes column

It's a little-known fact, but I have played one of the seven dwarves
Fifa's travelling circus once again steals limelight from real stars

Fifa's travelling circus once again steals limelight from real stars

Club World Cup kicked into the long grass by the continued farce surrounding Blatter, Garcia, Russia and Qatar
Frank Warren column: 2014 – boxing is back and winning new fans

Frank Warren: Boxing is back and winning new fans

2014 proves it's now one of sport's biggest hitters again
Jeb Bush vs Hillary Clinton: The power dynamics of the two first families

Jeb Bush vs Hillary Clinton

Karen Tumulty explores the power dynamics of the two first families
Stockholm is rivalling Silicon Valley with a hotbed of technology start-ups

Stockholm is rivalling Silicon Valley

The Swedish capital is home to two of the most popular video games in the world, as well as thousands of technology start-ups worth hundreds of millions of pounds – and it's all happened since 2009
Did Japanese workers really get their symbols mixed up and display Santa on a crucifix?

Crucified Santa: Urban myth refuses to die

The story goes that Japanese store workers created a life-size effigy of a smiling "Father Kurisumasu" attached to a facsimile of Our Lord's final instrument of torture
Jennifer Saunders and Kate Moss join David Walliams on set for TV adaptation of The Boy in the Dress

The Boy in the Dress: On set with the stars

Walliams' story about a boy who goes to school in a dress will be shown this Christmas