Budget: Tough tax rises and spending cuts expected

The Budget is likely to prove a crucial moment for the government

The toughest package of tax increases and spending cuts in a generation is expected to be unveiled later by Chancellor George Osborne in his first Budget.

Almost 900,000 low earners will be taken out of the tax system in what Mr Osborne will say is a "tough but fair" deficit-cutting package.

The chancellor will argue that the better-off will pay more.

But Labour say the poorest will be hit and cuts are ideologically driven.

They say the economy is too weak to withstand such a spending squeeze and the move could push the UK back into recession.

The rate at which people start paying tax will rise by £1,000 to £7,475 taking nearly 900,000 people out of the tax system.

Mr Osborne will deliver the coalition government's first Budget at 1230 BST (1130 GMT), fulfilling the Conservatives' pre-election pledge to hold a Budget within 50 days of coming to office.

Mr Osborne has said the Budget will set out necessary plans to bring down borrowing over the next four years and how this will be divided up between spending cuts and tax rises.

The government says borrowing levels inherited from Labour - which are set to total £155bn this year - are unsustainable and delaying action will damage market confidence in the UK and store up worse financial problems for the future.

Tax allowances

The chancellor is expected to announce a number of revenue-raising measures, including a levy on bank profits, an increase in capital gains tax and rises in cigarette and alcohol duties while a change in aviation tax is also expected.

But opposition, unions and employer groups have all expressed concerns about the steps being planned amid continuing speculation of a rise in VAT and a freeze on public sector pay beyond the one-year already planned in 2011-2012.

If the chancellor increases VAT in his Budget - which is far from certain - the opposition will argue that it will hit the poorest people in our society the hardest

Nick Robinson BBC Political Editor

A Labour Party spokesperson said: "The real test for the Budget is what it means for jobs and growth.

"Of course no-one's going to object to an increased personal allowance.

"But if it's paid for by a VAT rise the Tories said they wouldn't implement, and that the Liberals campaigned against, the public will rightly feel short changed."

The BBC's Political Editor Nick Robinson said the government's plans to raise personal tax allowances will take an estimated 880,000 people out of the tax system and also give millions of basic rate taxpayers a tax cut of £200 per year.

The plan is the first step towards a key Lib Dem coalition demand of taking all those earning less than £10,000 out of tax.

The chancellor must find £3.5bn to pay for the giveaway - which will be clawed back from top rate taxpayers - and Labour are likely to argue it is irresponsible in the current climate.

Nick Robinson said it will be clear from the chancellor's statement that overall people in all income groups will pay more as a result of other tax rises, spending and benefit cuts and limits to public sector pay and pensions.

He has said it is "far from certain" VAT will rise from its current 17.5%.

'Fiscal bombshell'

In an e-mail to Lib Dem members on Monday evening, Deputy Prime Minister Nick Clegg said the budget deficit amounted to a "fiscal bombshell" that had to be dealt with.

"Without action on the deficit, we will carry on racking up unaffordable debts our children will have to pay off," he said.

"We will carry on spending more money on debt interest than we do on our schools.

This needs to be a bold and ambitious Budget, with a credible pathway for restoring sound public finances and a convincing narrative for growth

John Cridland Deputy Director General, CBI

"And we will undermine the economic growth needed to create jobs and opportunities for all of us. There is nothing fair, liberal or progressive about any of that."

He rejected claims that the Liberal Democrats had "sold out" after they campaigned during the election against early spending cuts due to the fragility of the economic recovery.

"We have always argued that cuts would be necessary, but the timing should be based on economic circumstances, not political dogma," he said. "The economic situation today means that time has come."

'Hardest thing'

Mr Clegg said the economic situation in Europe had deteriorated in recent months while Labour had exacerbated the situation by making a large number of unfunded spending promises in its last few months.

"So cuts must come," he added. "We have taken the difficult decisions with care, and with fairness at their heart. You will see the stamp of our Liberal Democrat values in [the] Budget. But nonetheless, it will be controversial.

"This is one of the hardest things we will ever have to do, but I assure you, the alternative is worse: rising debts, higher interest rates, less growth and fewer opportunities."

Other measures widely forecast to be included in the Budget include a cut in the headline rate of corporation tax, a two-year freeze in council tax and the scrapping of Labour's planned 1% rise in National Insurance contributions paid by employers.

Unions have said any tax rises must fall predominately on the better-off, while business groups have called for radical reform of public services to avoid across-the-board tax increases.

"This needs to be a bold and ambitious Budget, with a credible pathway for restoring sound public finances and a convincing narrative for growth," the CBI's deputy director general John Cridland said.

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