£20bn gamble to save economy

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In a budget statement that surprised many with its scope, Chancellor Alistair Darling set out plans to kick-start the struggling economy by cutting VAT, boosting tax allowances, and offering more cash to parents and pensioners.

However, the "fiscal stimulus" will come with a sizeable price tag. Mr Darling admitted that state borrowing would hit £78bn this year and £118bn next year, while total national debt will top £1 trillion by 2012-13.

He made clear that the better-off would be asked to shoulder the bulk of the cost of the rescue operation, with everyone earning more than £40,000 poorer thanks to a half-point rise in national insurance for employers and workers.

The Tories claimed those pulling in more than £19,000 would also be hit - although Treasury officials insisted rises in starting thresholds meant they would not lose out.

The wealthy will endure more pain in 2010, when deferred tax rises take effect. In a highly symbolic move for New Labour, a new top income tax rate of 45% will be introduced for people earning more than £150,000 a year.

Personal allowances will also be slashed for everyone paid more than £100,000.

Altogether in 2010-11 the Exchequer is expecting to pull in some £4bn in extra taxes, as it seeks to reduce debt incurred by the downturn and fiscal stimulus.

The centrepiece of the Pre-Budget Report was a cut in VAT from 17.5% to 15%, which the Government hopes will encourage people to spend. But Mr Darling announced that the £12.5bn bill would be largely offset by rises in alcohol, tobacco and fuel duty.

Every pensioner will get a one-off payment of £60, on top of the £10 Christmas bonus, from January - three months early. An increase in child benefit has also been brought forward to January.