Alistair Darling drew the battle lines for the next election today when he announced a new 50p top rate of tax for high-earners to help to rein in record public borrowing.
In his second Budget as Chancellor, Mr Darling conceded that net public borrowing is to hit £175 billion this year and national debt will reach almost 80 per cent of GDP within five years.
But he predicted that Britain would start to lift itself out of recession by the end of 2009 thanks to the dynamism of the UK economy and burgeoning demand for high-tech exports.
In a Budget that promised more money for the jobless and for high-tech and green industries but did not deliver any real economic stimulus, Mr Darling announced that those earning more than £150,000 a year would be taxed at 50p in the pound, up from 40p, from next April. Those earning more than £100,000 a year will lose all personal allowances, significantly increasing their tax bills.
In his pre-Budget report, Mr Darling had already announced a rise to 45p from 2011 and his decision to bring the increase forward breaks a key pledge in Tony Blair's 2005 manifesto not to raise either the basic or top rate of income tax during this Parliament.
The move represents a clear break with the Blair years and the New Labour emphasis on rewarding economic success. The top rate of tax has been at 40p since Nigel Lawson cut it from 60p back in 1988.
Mr Darling told the Commons that the UK economy will contract by 3.5 per cent this year, making the current recession the worst since the Second World War. But he said that he expected economic growth to resume by the end of this year and to see growth next year of 1.25 per cent - more bullish than current market forecasts.
He said that the UK economy contracted by 1.6 per cent in the last quarter of 2008 and declined by a similar amount in the first three months of this year.
"But because of our underlying strength, the measures we are taking, domestically and internationally, I expect to see growth resume towards the end of the year," he added.
"The IMF forecasts published today confirm the problems that all countries will face this year. But they also show that the British economy will suffer less than Germany, less than Japan, less than Italy, and less than the euro area as a whole this year. The British economy is diverse, flexible and resilient - which is why we can be confident in recovery."
Mr Darling announced a £3 billion package of measures to help the jobless back into work and prevent those who lose their jobs becoming long-term unemployed. He also announced £1 billion in funding to help fight climate change, £2.5 billion to help businesses invest in high-technology jobs and £500 million to kickstart stalled housing projects.
He also announced a £750 million strategic investment fund which he said would help to unblock as much as £50 billion in new business investment this year, including £10 billion in the communication sector. The Government will also contribute £300 million towards a "scrappage" scheme under which motorists can claim £2,000 towards a new car or van if they trade in a vehicle that is at least ten years old.
In other measures, petrol duty will increase by 2p per litre in September and then by 1p a litre above inflation each April for the next four years.
Alcohol duties will go up by 2 per cent - about 1p a pint - from midnight. Tobacco duty will rise by 2 per cent from 6pm - adding about 7p to a packet of 20 cigarettes. The Chancellor said these measures would raise more than £6 billion by 2012.
But scrutiny of the Budget, especially on the international capital markets, will focus on the depth of public borrowing and Britain's long-term ability to service and reduce national debt.
The Chancellor said that borrowing will start to fall from 2010 as the economy recovers. Projected public sector borrowing next year would be £173 billion, equivalent to 11.9 per cent of GDP, falling to 9.1 per cent in in 2011-12, then 7.2 per cent and 5.5 per cent in 2013-14.
Mr Darling said national debt relative to GDP would increase from 59 per cent this year, to 68 per cent next, 74 per cent in 2011-12, 78 per cent and 79 per cent in 2013-14.
"It will stabilise and then begin to fall in 2015-16," he added. "In countries across the world, because of this economic crisis, it will take longer for deficits to come back into balance. Because of the steps we are taking, I expect the underlying current budget deficit to come back into balance two years later."
Mr Darling's upbeat prediction on growth contrasted with the latest economic statistics this morning, which showed unemployment reaching 2.1 million - its highest level since Labour came to power in 1997.
In his Budget reply, the Tory leader, David Cameron, assailed "Labour's decade of debt" and laid the blame firmly at the feet of Gordon Brown for failing to shore up the public finances during his years in the Treasury.
"This Prime Minister has certainly got himself in the history books - he's written a whole chapter in red ink," he said. "Britain simply cannot afford another five years of Labour."
Source:The times
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