Darling soaks the rich and the rest of us too
• National Insurance rise hits 10m
• Public sector pay squeeze
• Bingo tax cut
Alistair Darling risked alienating key swing voters today when he announced a surprise increase in national insurance for 10 million middle income earners and pay cuts for nearly 4 million public sector workers, in the biggest spending squeeze since the 1970s.
Darling deferred much of the pain until 2011 – including a 0.5 % increase in national insurance on anyone earning more than £20,000 – as he tried to soften the potentially lethal political impact before the general election.
Alistair Darling delivers his pre-budget report in the House of Commons. Photograph: PA Wire/PA
The chancellor said a £178bn budget deficit this year made higher taxes, spending restraint and a two-year clampdown on public sector pay unavoidable, but said that unlike the Conservatives, Labour would defer the pain until the economy had gained strength. "The choice facing the country is between securing recovery or wrecking it," he said as he admitted the economy would contract by 4.75% this year – the biggest fall since 1921.
As punishment for the City, he also imposed a populist one-off 50% tax on bankers' bonuses of more than £25,000. The Tories said they would not oppose the measure, which would also impose a levy on the banks who choose to reward their staff instead of building up cash reserves.
But after the well-publicised raid on the City, Darling delivered a surprise measure to claw £3bn a year from modestly paid workers. Everybody earning more than £20,000 would be affected by a half a percentage point increase in NI from April 2011.The rise will cost a worker on the average UK income of £25,000 a year an extra £4 a week.
The Tories instantly pledged to make the repeal of the national insurance rise their top priority, describing it as "a tax on jobs and on the many".
David Cameron's advisers believe the dire state of public finances makes it more likely Gordon Brown will call a March election – two months earlier than anticipated. Labour would not want to hold a full budget immediately before the election, the Tories predicted.
George Osborne, the shadow chancellor said: The full scale of the economic disaster that Labour has visited upon the country is clear to all of us." Business leaders and the Conservatives said it was remarkable that the tax rises announced today were not being used to pay off debt more quickly, but instead to protect "frontline" public services, specifically an extra £15bn over two years for schools, hospitals and keeping up police numbers.
Darling did little to define frontline services, but the children's schools and families department said 80% of its budget was protected up to 2012.
In what is a key dividing line for Darling, he also promised he would continue with the £30bn spending rises he had announced for 2010-11, saying any cutback would choke off a fragile recovery. The Tories repeated tonight that cuts should start next year, adding they would ringfence only the health and relatively small overseas aid budgets.
Osborne also condemned Darling for hiding the scale of the spending cuts which will come across Whitehall after the election. The Institute of Fiscal Studies warned that other public services , such as housing, transport and higher education, faced cuts of 10% or more.
Darling announced a further £5bn in efficiency savings, including cuts in residential care, prisons and the science budget.
He also announced a series of measures to boost companies operating in hi-tech sectors of the economy, including £120m for green industries and a trade-in scheme to let homeowners replace their old boilers based on the car scheme.
Darling also risked alienating some of Labour's core vote when he announced he would impose a two-year below inflation pay deal of 1% on 3.9 million public sector workers . The Treasury is predicting inflation at 2% from 2011 to 2013, and claimed the 1 % cap on basic pay would generate savings of £3.4bn a year. In addition, state contributions to public sector pensions will be capped from 2012, eventually saving the Treasury £2bn.
Brendan Barber, general secretary of the TUC, described the pay cuts as arbitrary. "Public sector workers – many of whom are low paid – should not have to pay the price for a crash they did nothing to cause," he said.
The chancellor claimed a combination of stronger growth, tax increases and a 0.8% increase in spending over the next three years would lead to a halving of the budget deficit. A smaller increase in unemployment and a recovery in share prices meant the deterioration in public finances since the Budget was not as pronounced as some analysts were expecting. Following this year's record drop in output, Darling said the economy would grow by a modest 1-1.5% next year but then pick up steam to expand by 3.5% in both 2011 and 2012.
"The steps that I have announced today are aimed at securing recovery, reducing borrowing, and through targeted investment, providing a springboard for long-term growth," Darling said.
Economists warned, however, that the Treasury's growth forecasts looked optimistic. Roger Bootle, economic adviser to Deloitte, said the fiscal projections were "highly vulnerable" to any slippage in economic growth. "The forecast for 3.5% growth in 2011 and 2012 looks highly ambitious. If, as I suspect, growth turns out to be much weaker (and I expect 1.5% in 2011 and 2% in 2012) then the borrowing numbers will be much higher," he said. "I forecast £190 billion for next year and £150 billion for the year after.
"But I doubt that the markets will be fazed by the PBR's inaction. The all-important announcements will come after the election, whoever wins it. This has been the Phoney Budget Report. The markets realise this."
Martin Weale NIESR: "I would give it about 3 out of 10. It all hangs on the growth forecasts and nothing is ever said about what will happen if it doesn't turn out as hoped. I hope it does turn out as they expect, but that is the most I can say."
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