City alarmed by 50% tax rate

Alistair Darling stunned the City by borrowing eye-watering sums to make ends meet as he tore up his growth forecasts in his speech to the Commons.

But he fought back with a Budget that battered the better off — anyone earning more than £100,000 will suffer — to help pay for the credit crunch caused by blundering bankers. Some critics called it the end of New Labour.

The new top rate of tax was the sting in the tail of a speech dominated by dreadful economic figures, the worst seen in peacetime.

Most jaw-dropping of all was the record borrowing needed to make ends meet over the next five years — an astonishing £703 billion. The Treasury will borrow £175 billion this year alone, equivalent to 12.4 per cent of GDP and making a nonsense of the forecast of just £38 billion in last year's Budget. That trounced the last record set under the Tories in 1993, of £110 billion or 7.8 per cent of GDP. Another £173 billion will be borrowed next year, then £140 billion, £118 billion and £97 billion.

The need for such desperate deficits was exposed by data on the scale of the recession, confirmed as likely to be the longest since the Second World War.

Instead of the 2.5 per cent growth that Mr Darling predicted a year ago, the economy will shrink by some 3.5 per cent this year.

The Treasury expects an extra one million unemployed by the end of next year. That means surging jobless queues throughout the general election year. The Chancellor said he was confident the economy would bounce back. "Britain can, and will be, a world leader and this Budget will help make sure we seize this opportunity," he told MPs.

He presented the tax rises as "fairness" and, presenting himself as a champion of the poor, found money for modest giveaways — cash for disabled children to build nest eggs for their futures using Child Trust Funds and a measure to let grandmothers providing free family childcare earn points towards a full state pension.

But David Cameron called it an "utter mess" and said Labour could never again pose as the party of economic competence.

"Any claim they have ever made to economic competence is dead, over, finished," said the Tory leader. "This is the worst boom and bust ever."

The historic Budget was preceded by the announcement of another surge in unemployment to 2.1 million, higher than Labour inherited, prompting a £1 billion package of Budget measures to protect or create jobs. There were also well-trailed measures to boost construction, help the car trade, and boost green energy.

Criticism of the Budget measures was led by the respected Institute for Fiscal Studies, which doubted that the 50 tax rate would raise much more than half a billion pounds but the Treasury insisted the figure would be nearer £1.8 billion.

And the International Monetary Fund questioned the future growth predicted by the Treasury. It forecast the economy to shrink four per cent this year, and another 0.4 per cent next year. If the IMF is correct, there is a £23 billion black hole in Mr Darling's plans.

Mr Darling's tax raid on the better off was a surprise that drew distressed "oohs" from across the chamber — and was perhaps the first time that a Chancellor has had so much bad news to announce that a tax rise was deemed to make more attractive headlines.

The new 50p tax band starts on earnings over £150,000 a year and comes in next April. It replaces the 45p rate announced in the pre-Budget report and comes in a year earlier than its planned start date of 2011. A nakedly political move, it was clearly designed to wrongfoot Mr Cameron, some of whose MPs were unhappy that he backed the 45p tax and will be pressing him to oppose the rise. Labour believes it will please voters angry at seeing wealthy bankers bailed out for their catastrophic mistakes.

In another move targeting higher earners, people in the £150,000-plus earnings bracket will lose tax relief on pension contributions. Relief will taper down from the current 40 per cent level to a bottom rate of 20 per cent level for those on £180,000 or more.

Mr Darling said it was all about fairness, saying it was "an anomaly" and a loophole that the richest received so much tax relief.

And completing a triple whammy attack on the wealthy, people in the £100,000-plus bracket will see their personal allowances gradually withdrawn.

Many MPs felt Labour had turned its back on New Labour's nostrum that hitting high earners was bad politics because everyone aspired to be rich one day.

"These measures are necessary to build our recovery and secure our country's economic future," said the Chancellor.

The 20p and 40p tax rates do not change and duties on alcohol were held down from previously planned rises to aid struggling pubs. Drinkers pay a penny more for a pint of beer from midnight, 4p more for a bottle of wine and 13p more for spirits, rises of two per cent.

Drivers will pay an extra 2p per litre on fuel from September, although Mr Darling said he would keep an eye on oil price rises before going ahead. Fuel duty will thereafter rise 1p each year in addition to inflation. Smokers pay 11p more for a packet of 20 cigarettes from 6pm.

Overall, the Budget measures give the economy a £5 billion boost in the next year while the recession is at its worst. Efficiency savings totalling £35 billion will be yielded from Whitehall over the medium term as part of a map to balance the books by 2017/18, two years later than the date in the pre-Budget report plans.