Budget 2009: Alistair Darling's great financial squeeze on the rich

• Rich targeted by budget with 50% tax rate for those on over £150,000
• Restrictions on spending to be tighter than Thatcher era
• Debt to reach 80% of GDP – highest level in peacetime

• Larry Elliott, Patrick Wintour and Heather Stewart in Washington
• guardian.co.uk, Wednesday 22 April 2009 23.12 BST
• Article history

The chancellor's big day Link to this video

Alistair Darling attempted to lay down battle lines for next year's general election with a £7bn squeeze on the rich followed by a brutal freeze on public spending in the next parliament.

Admitting that the worst year for ­economic growth since 1945 would create a £175bn hole in the public finances this year, the chancellor broke Labour's 2005 manifesto pledge not to raise income tax by lifting the top rate for those earning more than £150,000 to 50% from next April. The "soak the rich" theme also included the abolition of personal allowances for those earning more than £100,000 a year and the phasing out of higher-rate pension relief for earners of more than £150,000.

Tax experts said the 50% rate, together with the loss of the personal allowance, would cost someone earning £150,000 a year £200 a month.

But while Darling brought forward spending as part of a £5bn boost to the economy this year, saying it was ­impossible for governments to cut their way out of recession, he laid out future plans for ­public spending more severe than under Margaret Thatcher's ­governments in the 1980s.

Current spending on the running costs of the state would grow by just 0.7% a year from 2011-12 but deep cuts in investment in infrastructure projects will mean zero growth in total spending from 2013. With the national debt doubling, to 80% of GDP by 2013, the government will be paying £43bn a year in interest payments – more than the current schools budget.

Darling said extra spending on ­tackling youth unemployment, boosting housebuilding, investing in key sectors of the economy and providing help for ­pensioner savers reflected the difference between Labour and the Conservatives.

"Everything we have done - whether ­supporting families now, ­maintaining investment in our public services and putting the nation's finances on a ­sustainable path - is based on our values of fairness and opportunity," he said. "Even in this time of global economic difficulty, we are determined to continue building a fairer society."

Measures aimed at easing the pain of the recession and reviving the economy included £2.5bn to keep young unemployed people off the dole, help for pensioners, a scheme to encorage people to buy new cars and £1bn of investment in combating climate change.

But on a day that saw unemployment rise to its highest level since Labour came to power in 1997, David Cameron said the ­government had lost any claim to ­economic competence."Everyone can see what an utter mess this Labour ­government and this Labour prime ­minister have made of the British economy. The fastest rise in unemployment in our history. The worst recession since the second world war. And the worst peacetime public finances ever known," he said, adding that the government was planning to borrow more in the next two years - £348bn - than every administration in the past 300 years.

George Osborne, the shadow ­chancellor, signalled that if any tax rises would be reversed by a future Tory government it would be the 0.5% increase in national insurance. The opposition is also intent on slowing the government's planned rate in growth of current public spending in 2010 of 1.7% but Osborne gave no details of what the Conservatives would cut department by department, or what would happen after 2010.

The Tories acknowledged that Labour has announced a combined freeze on public spending by the middle of the next parliament, saying: "It is another little-noticed political trap they have laid for us." If the Conservatives propose tighter current spending, there will be cuts in real terms.

A Tory source said: "Brown, throughout the 1980s, said that cutting capital spending when the public finances are a mess is ­precisely what shouldn't happen. Now he's doing it."

Darling said low interest rates, the budget stimulus, a weaker pound and lower inflation would kickstart the ­economy late this year, and extra ­spending on hi-tech industries would provide a ­platform for long-term recovery.

But Treasury forecasts showing that the economy will snap back from a 3.5% drop in growth this year to expand by 1.25% in 2010 and 3%-plus in each of the three following years was greeted with scepticism by the City.

Sterling fell by 1.5% and the gilts market was jittery at the prospect of high levels of government debt for years to come.

Roger Bootle, economic adviser to Deloitte, said it could be 30 or 40 years before the level of state debt returned to its pre-recession level of 40% of GDP.

Darling's optimism was also questioned by the International Monetary Fund which predicted the UK would remain trapped in recession well into next year. The IMF believes that with crashing house prices and plunging shares knocking up to £1trn off the wealth of Britain's families, they will still be tightening their belts long after the banking crisis is over.

It forecast a 4.1% decline in GDP this year, followed by another fall, of 0.4%, in 2010.