ALISTAIR Darling yesterday hit big-earners with a 50 per cent tax rate as he attempted to deflect attention from the worst public finance figures since the Second World War.
The Chancellor announced plans to borrow £175 billion this year and £173 billion the next in a desperate attempt to plug the black hole in his reserves caused by the recession and the unknown cost of the banking bail-out.
He said those earning mo
re than £150,000 would pay income tax at 50p in the pound from next April, while personal tax allowances would be restricted for earnings above £100,000. This breaks a Labour manifesto pledge not to raise income tax, and will be followed in 2011 with the removal of tax breaks on pension contributions for high-earners.
The Conservatives last night sidestepped a potential political banana skin by saying that reversing the higher tax rate would not be a priority. But there were fears that the attack on high-earners might spark a brain drain from the financial sector.
There were also claims that Mr Darling's second Budget was "dishonest", as the biggest tax burden will fall not on the wealthy but on motorists, who face five years of fuel duty hikes, beginning with a 2p per litre increase in September.
This will raise £3.6 billion over the next three years, compared with £2.9 billion expected from the higher tax rate.
Mr Darling yesterday published figures revealing national debt was expected to exceed £1.1 trillion next year once the full cost of the bank bail-out emerged, and the books would take until 2017-18 to come back into balance. The Tories said the Budget would worsen the plight of people earning from £19,000 a year, who will lose out when National Insurance rates increase by 0.5 per cent from April 2011, a move announced last year. They said reversing the NI increase was their priority, rather than scrapping the 50p tax rate.
There was also instant concern that Mr Darling had been over-optimistic with his growth projections. There were hoots of derision when he told the Commons that the UK economy would grow by 1.25 per cent next year, and less than an hour after he sat down the International Monetary Fund said it expected the British economy to shrink by 0.4 per cent in 2010.
The CBI said the Budget did not set out a "credible and rigorous path" for restoring the public finances to health.
Mr Darling admitted Britain was suffering from the "most serious global economic turmoil for over 60 years".
Unveiling a three-year spending plan that will see a £5 billion giveaway this year, followed by £5 billion of tax rises from 2011, he said public borrowing would total £175 billion this financial year – 12.4 per cent of gross domestic product (GDP).
This would be followed by further eye-watering levels of borrowing – £173 billion in 2010-11, £140 billion in 2011-12, £118 billion in 2012-13 and £97 billion in 2013-14. This totals £703 billion over five years, and was described by Conservative leader David Cameron as proof of the "utter mess" Labour had made of the economy.
Mr Cameron said the £348 billion that Mr Darling planned to borrow over the next two years was more than had been borrowed by every government put together "since the Bank of England was first founded more than 300 years ago". He said: "As of today, any claim they have ever made to economic competence is dead, over, finished."
Mr Darling said there were "no quick fixes" to solving the crisis caused by the global banking crash that began in 2007, but he said he was determined to act to prevent a "lost generation" of young people without jobs.
He unveiled a series of measures to expand the work of job centres and promised that, from next year, all people under 25 who had been out of work for a year would be found a job or training place.
Predicting that the recession would be over by the end of the year, he said GDP growth would be 1.25 per cent in 2010 and 3.5 per cent in 2011. But the level of debt as a percentage of GDP will rise from 59 per cent this year to 79 per cent in 2013-14 – revealing the extent to which Gordon Brown's 40 per cent "sustainable investment rule" had been destroyed by the credit crunch.
Mr Darling said allowing borrowing to rise was the "right thing to do" to tackle the recession and bring it to an end as quickly as possible.
"Some have argued that we should cut public services immediately, rather than invest and grow our way out of the recession. That would be the wrong thing to do,"
There was concern that the higher tax band – which will cost £80 a week to people earning between £150,000 and £200,000 a year – will wreak havoc in the financial sector. Chris Sanger, UK head of tax policy at Ernst & Young, said: "The key risk is such extreme rates will deter entrepreneurs and successful wealth-creators from coming to the UK."
Q & AMind the gap: Darling faces a battle to balance outgoings with receipts WHAT is public borrowing and why is it a problem that the UK's figures are so large?Public sector net borrowing, to give it its proper title, is the amount of money the government needs to plug the gap between its expenditure (current and capital) and its receipts. The Chancellor said it would have to rise to £175 billion this year and £173 billion the next – unprecedented in peacetime. This is a problem as it has to be repaid – effectively meaning big tax rises in the future.
But Alastair Darling did announce a 50 per cent tax rate – isn't that enough?No. It will raise less than £3 billion over the next three years – a drop in the ocean compared with the scale of the debt. The Treasury estimates that there are only around 600,000 people earning £100,000 or more, and they are the people most able to dodge higher tax demands.
What about growth? And when will the recession end?Mr Darling expects the recession to come to an end towards the end of the year – six months later than he predicted in the November Pre-Budget Report.
He then predicts the economy will grow by 1.25 per cent in 2010. But his figures are regarded as over-optimistic by the International Monetary Fund – which Gordon Brown used to regard as the world's "early-warning system". The IMF also believes that the depth of the recession in the UK this year will be -4.1 per cent, a more bleak analysis than that of the Chancellor, who predicts -3.5 per cent, itself the worst fall in modern history. Mr Darling claims his over-ambitious forecasts last year were echoed by other forecasters, but the suspicion is that he is, again, being too hopeful.
BUDGET 2009: FULL COVERAGE•
Slideshow: The Budget in graphics•
Darling bounces UK deep into debt•
Darling throws petrol bomb at recovery hopes•
Analysis: Chancellor's projections for growth a real gamble•
Swinney says cuts will lead to loss of 9,000 jobs•
Energy: Boost for North Sea fields is welcomed but detail needed•
Whisky: Few cheers as duty rise comes at the worst time, say whisky leaders•
Leader: Wait-and-see Budget shows lack of leadership•
Cartoon by Iain Green