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

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