Budget could bring tax rises as Alistair Darling counts cost of G20

Alistair Darling told Andrew Marr the nation has to live within its means
Philip Webster, Political Editor

Alistair Darling is preparing the ground for drastic revisions of his growth and borrowing forecasts in the Budget, raising the prospect of further deferred tax rises to balance the books.

The Chancellor admitted yesterday that he and the Treasury had underestimated the severity of the recession and said the economy was unlikely to grow before the end of the year.

He is understood to be preparing to forecast that the economy will contract by between 2.5 per cent and 3 per cent this year, the worst performance since the Second World War.

That means that public borrowing in the coming financial year will be well above the £118 billion predicted a few months ago, making it even harder for him to get the public finances back on course over the medium term without more tax rises and spending cuts.

The difficulty of the task facing Mr Darling was underlined yesterday by the leak of discussions involving senior officials from the Department for Transport.

They were reported to have told suppliers that the Chancellor was aiming to restore public finances over seven to ten years and that significant cuts in spending or rises in personal taxation – or both – were likely.

In the PreBudget Report, Mr Darling announced a new top rate of tax of 45 per cent for people earning more than £150,000, the end of the tax-free personal allowance for higher earners and a 0.5 per cent rise in national insurance for employers and employees.

All were deferred until after the general election but it emerged from leaks that he had also considered raising the rate of VAT, currently reduced from 17.5 per cent to 15 per cent, to 18.5 per cent or even 19.5 per cent. Even so, Mr Darling is known to be looking at targeted measures in his statement on April 22 – likely to involve more spending – to help those affected by the recession.

He said that measures agreed at the G20 summit to boost trade would be crucial for Britain’s economy, protect British jobs and “make the recession shorter than it might otherwise be”.

Gordon Brown, anxious to show how the summit will help people in Britain, has called Mr Darling, Mervyn King, the Governor of the Bank of England, and Lord Turner of Ecchinswell, the chairman of the Financial Services Authority, to Downing Street this morning. They will discuss how the decisions taken by the summit on bank regulation and increasing the flow of trade finance can be swiftly implemented in Britain.

Mr Brown will also follow through the G20’s decision to clamp down on tax havens by writing to the Crown dependencies of Jersey, Guernsey and the Isle of Man calling for greater transparency.

He will also tell British Overseas Territories, such as Bermuda, the Cayman Islands, the Turks & Caicos Islands, Gibraltar, the British Virgin Islands and Anguilla, to implement their pledges to commit themselves to new international standards. Some appear on the Organisation for Economic Cooperation and Development’s “grey list” of jurisdictions that have so far not made good their promises.

Mr Darling refused to be drawn on his forecasts when he appeared onThe Andrew Marr Show on BBC One but said: “If you look at what has happened, the downturn since last autumn has been far deeper than I think people expected in any part of the world.” Asked if he could afford to put extra resources into the economy to stimulate recovery, he said: “I have to balance the need to support our economy with the fact that you have got to ensure that, in the medium term, all countries live within their means.”

On economic prospects, he toldThe Sunday Times: “You cannot, you must not, build up false hope.” The Conservatives seized on Mr Darling’s remarks as showing that the Government had lost control of the economy, amid signs from polls that Mr Brown was receiving a public boost over his handling of the G20.

George Osborne, the Shadow Chancellor, said: “Budget day looks like being the day when Labour’s failures are finally laid bare.”