Tax rises delayed until after election

UK PRE-BUDGET:SIGNIFICANT RISES in taxes and stiff spending curbs will be imposed to cope with Britain's growing national debt, but they will not come into force before next year's general election.

Unveiling his pre-budget report, Chancellor of the Exchequer Alistair Darling set the ground for a clash with trade unions by limiting State workers to a 1 per cent wage rise over the next two years – with inflation predicted to run at 3 per cent.

However, Mr Darling’s belief that the UK economy, which will shrink by nearly 5 per cent this year, will grow by 3.5 per cent in both 2011 and 2012 was sharply questioned last night by leading economic forecasters.

In addition, employer organisations and unions condemned his decision to increase national insurance rates by 1 percentage point to 12 per cent for every worker earning more than £20,000 a year from April 2011.

Banks preparing to pay out multibillion-pound bonuses to staff were given a blunt choice by the chancellor: drop the plans and use the money to build up their capital reserves, or else face a 50 per cent levy on any bonuses paid.

The British Bankers’ Association condemned the move, saying it “may well look now like a significantly less attractive place to build a business” and that Mr Darling should have waited for an international agreement on bankers’ pay.

British borrowing will run at £176 billion next year, but Mr Darling said it would drop to £140 billion in 2010 and £96 billion in 2011, and to be halved by 2013. Provisions for losses from State support for banks have been reduced to £10 billion, down by £50 billion.

National Health Service spending will rise by inflation in almost all areas, and the schools budget will increase by nearly 1 per cent in real terms, while police will have enough to maintain existing force numbers.

However, other government departments will have their budgets savaged – down by up to 10 per cent in real terms over the next five years – from which they will have to meet pay rises, inflation and extra demands.

Mr Darling faced accusations that he had produced “a general election manifesto” by Liberal Democrat MP Vince Cable after it emerged that cash spending will rise by £31 billion next year.

Higher-paid state staff earning more than £100,000 will have to pay higher pension contributions, and have their pensions capped; while people in the private sector will be limited from using pension plans to limit their tax liability.

Mr Darling said UK borrowing will rise to £178 billion this year – up from the £175 billion predicted, though he insisted that borrowing will fall from 12.6 per cent of GDP to 4.4 per cent by 2014/15.

Despite prime minister Gordon Brown’s practice of emphasising the efforts to get the young employed back to work, it emerged that £1.4 billion will be cut from the jobs guarantee budget from 2011.

Defending the budgetary plans last night, chief secretary to the Treasury Liam Byrne said action to cut the UK’s borrowing could not occur until 2011 to give the economy a chance to recover.

British pre-budget report: main tax elements

National insurance– Rates will rise by a further 0.5 percentage points for employers, employees and the self-employed from April 2011

Bank bonus tax– Banks will be charged a one-off levy of 50 per cent on all bonuses over £25,000 until April 5th, 2010, or longer if 2009 bonus payments are deferred

Corporation tax– Rise in smaller companies' corporation tax to 22 per cent from 21 per cent  will be deferred by one year until April 2011.

Profits from UK patents granted after 2011 will be taxed at a reduced rate of 10 per cent from April 2013

VAT– Rate will revert to 17.5 per cent on January 1st, 2010, as planned after temporary 13-month reduction to 15 per cent

Company car tax– Electric cars will be exempt from annual road tax for next five years