Roll on 5 May: Brown budgets for the grey vote

Labour and the Tories are locked in combat for the all-important "grey vote" at the general election after Gordon Brown used his Budget to spend an extra £1.3bn on pensioners over the next two years.

The Chancellor tried to neutralise a Tory promise to halve the council tax bills of pensioners by handing them a £200 rebate towards their payments from next month. He announced free off-peak local bus travel for pensioners from next year and a £200 winter fuel allowance this year, and scrapped the system under which they lose part of their state pension and benefits after hospital stays of more than a year.

Although he stopped short of a giveaway Budget, Mr Brown delighted Labour MPs with eye-catching measures worth about £1.5bn in 2005-06 and £1.1bn the following year, targeted at key electoral groups. They predicted that the package would help Labour win a third term at the election expected on 5 May.

The Chancellor doubled the threshold at which homebuyers pay stamp duty to £120,000 after pressure from Tony Blair, raised inheritance tax by more than inflation, and announced a targeted "tax cut" for six million families on low and middle incomes through his flagship tax credit scheme. He made Labour's investment in public services and the Tories' pledge to cut spending by £35bn by 2011-12 a dividing line at the election.

Michael Howard, the Tory leader, challenged Labour to "bring on" the election. He described the package as a "vote now, pay later Budget", a warning echoed by City economists, who said "conjuring tricks" would not avert the need for big spending cuts or tax hikes next year.

Charles Kennedy, leader of the Liberal Democrats, said the Budget was "little more than a sticking plaster" to get Labour through the election. The biggest winners were the over-65s, the group most likely to vote, who found themselves the subject of a political auction. Mr Brown's £200 rebate on council tax bills was designed to neutralise a Tory pledge to halve payments through rebates worth up to £500.

The Tories said that if they won the election, pensioners would gain Mr Brown's one-off refund and their own, permanent, 50 per cent discount on council tax. "We will see him [Mr Brown] and raise him," said Oliver Letwin, the shadow Chancellor. Tories said Labour's rebate was only funded for a year, which would leave old people £250 worse off in a year.

Mr Brown delayed a hike in petrol duty until September, left duty on spirits unchanged and put 1p on a pint of beer, 4p on a bottle of wine and 7p on a packet of cigarettes.

Reclaiming his mantle as a "prudent" chancellor, he managed to announce a small tightening of his fiscal grip, finding room for limited sweeteners by juggling his figures. He gave his coffers a one-off £1.1bn boost by forcing North Sea oil companies to speed their corporation tax payments and £665m by clamping down on tax avoidance.

He outlined plans for all children to be in education or training from the age of three to 18, and promised £9.4bn to refurbish primary schools and a £1.5bn building programme for further education colleges.

Although Mr Brown said critics who had queried his borrowing and growth forecasts had again been proved wrong, City experts warned there were storm clouds on the horizon.

Professor Peter Spencer of York University, said: "After the election, the Chancellor will recognise that it is not prudent to run the nation's coffers on such a hand-to-mouth basis."

He said Mr Brown had been forced to make a "virtue out of a necessity" by only offering small handouts. "Basically the oil companies are stumping up the cash for this," he said. "Talk about scraping the barrel."

Robert Chote, director of the Institute for Fiscal Studies, said: "Gordon Brown offered modest sweeteners to pensioners, motorists and homeowners, but what he gave with one hand he took with the other."

AT A GLANCE

* Stamp duty threshold raised from £60,000 to £120,000

* Council tax cut by £200 in all homes with someone over 65. Free bus travel for all over-60s

* 1p on beer, 4p on wine, 7p on cigarettes

* Inheritance tax threshold up from £263,000 to £275,000

* £9.4bn over five years to rebuild or refurbish schools

* Extra £1.8bn from UK oil taxes and closing loopholes

* Growth next year 2.5-3 per cent. Borrowing to fall from £34bn to £32bn