David Cameron announced plans for a £4.1bn tax cut for savers yesterday as he sought to fend off Labour's attacks that the Tories would "do nothing" to ease the pain of the recession.
The Tory leader tightened his planned squeeze on public spending as he and Gordon Brown highlighted the widening gap between the two main parties on economic policy in rival speeches.
With many savers anxious about plummeting interest rates, Mr Cameron called for the abolition of tax on income from savings held by all basic rate taxpayers. The Tories said they would benefit by up to £7,200 a year. Only people on the top 40 per cent rate would pay tax on their savings income. He also proposed that the annual tax-free income allowance for pensioners be increased by £2,000 – from the current £9,030 for 65- to 74-year-olds and £9,180 for over-75s. The Tories claimed they would be up to £400 a year better off.
Mr Brown hinted on Sunday that the Government would announce some help for savers in the Budget this spring. It may, however, be less generous than the plans set out by the Tories and could be limited to pensioners.
Mr Cameron risked a new row over "Tory cuts" by speeding up his party's plans to shave billions off Labour's spending programme to the financial year starting in April. He said a Tory government would match Labour's budgets for the NHS, schools, defence and international development, but reduce the annual growth in other areas – including the Home Office, welfare, transport, skills and universities – to 1 per cent on top of inflation, compared to 4.1 per cent under Labour's proposals. That would raise £5bn to finance the tax cuts on savings and other measures.
The Tory leader said his party would ensure the "really big change" required to transform Britain "from a spend, spend, spend, society into a save, save, save society". He denounced Labour's response to the downturn as "economically stupid and morally indefensible" because it encouraged debt and undermined saving.
Mr Cameron said: "We are at the end of the road under Labour. There is no going forward with them. This country needs to strike out in a new direction. So it is a clear choice: a grim future under Gordon Brown, or a good future with the Conservatives."
But the Prime Minister branded the Tories' opposition to his fiscal stimulus as "socially divisive" and "economically mistaken". Speaking at a summit with business leaders in central London, he promised a series of announcements to generate thousands of "green jobs", boost the digital industry and bring forward investment plans. "The countries, I believe, that continue to invest for the future through the downturn will be the countries that emerge strongest in the future," he said.
Last night, Labour claimed the Tory plans would mean a £610m cut in the universities and skills budget, an £840m reduction on transport and a £300m cut in schemes such as SureStart to help low income families with children.
Yvette Cooper, the Treasury Chief Secretary, said: "David Cameron's proposal for spending cuts in a recession is economic madness. Almost 60 per cent of pensioners won't benefit from this as they already pay no tax. The vast majority of ordinary people also won't benefit as they can already put all their annual savings into tax-free savings schemes."
The independent Institute for Fiscal Studies warned that the Tory proposals risked reducing growth by cutting the amount of money spent in the economy. Carl Emmerson, its deputy director, said the plans would inflict "a very sharp slowdown in the rate of spending growth" by the Whitehall departments whose budgets were not protected, and the beneficiaries may choose to save their extra cash rather than spend it.
Nick Clegg, the Liberal Democrat leader, said: "Cutting savings tax will mean someone saving £100 will only get an extra 40p a year. If David Cameron is going to be taken seriously, he has to identify what cuts he will make. How many fewer police officers will there be on the street and who will have a smaller pension?"
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