Darling's Budget hits the rich with tax rise to 50p

LONDON – British Chancellor of the Exchequer Alistair Darling yesterday drew the battle lines for a general election in a year's time by announcing a tax rise for the rich to help fund a record 700 billion ($1820 billion) boost in public borrowing over the next five years.

In what was called a "going for broke" Budget, the Chancellor breached New Labour's election manifesto pledges since 1997 not to raise the 40p top rate of income tax.

A new 50p rate will apply on earnings above 150,000 a year from next April. The same group of high earners will also see the 40 per cent tax relief on their pension contributions pared back. Personal tax allowances for people earning more than 100,000 a year will be abolished.

Darling told the House of Commons that borrowing would rise to an unprecedented 175 billion in the current financial year because of the recession. It is the highest level of borrowing since World War II and a huge increase on the 38 billion he forecast a year ago and the 118 billion he predicted in November. It will be 173 billion next year, he said.

But experts predicted the actual figures would be even worse, accusing him of being wildly over-optimistic in predicting a rapid bounce back to 3.5 per cent growth from 2011.

Only minutes after the Chancellor finished speaking, the International Monetary Fund contradicted his forecasts. It said the British economy would contract by 0.4 per cent next year, challenging his prediction of 1.25 per cent growth.

Darling rejected pressure from some Cabinet colleagues and Labour MPs for a 50p top rate on incomes of 100,000 a year. In his discussions with Prime Minister Gordon Brown on the Budget, the Chancellor insisted on spelling out clearly how the nation's books would be balanced to try to reassure the financial markets. The rebalancing will not be achieved until 2015-16, two years later than planned in November.

City analysts warned that the tax increase could provoke a "brain drain" from Britain. Cabinet ministers denied the "soak the rich" strategy marked the end of New Labour, even though former Prime Minister Tony Blair blocked Brown's plans for a 50p top rate before the 1997 election.

Lord Peter Mandelson, who in 1998 said New Labour was "intensely relaxed about people getting filthy rich as long as they pay their taxes", said last night: "This is a serious economic shock and we have to respond to it in a tough, responsible and fair way."

Pointing out that President Barack Obama was raising taxes on the rich, the Business Secretary asked: "Does Britain really want to be the odd one out? Fairness is not only popular - it is right." Labour sources insisted the tax hike would affect, "the few, not the many". Only 1 per cent of taxpayers would be hit by the 50p rate.

The Tories will hope to turn the tables on Labour by pledging at the election to, "protect the many, not the few". They will not reverse the tax increases affecting people earning more than 100,000, fearing that Labour would brand them, "the party of the rich".

If they win power, they will seek bigger spending cuts to head off the 0.5 per cent rise in national insurance payments due in 2011, which will affect workers paid more than 20,000 a year.

"These are tax rises for the many, not the few," a senior Tory source said. "We will make sure the election battleground is all about these national insurance rises."

Calling it a "dishonest Budget", the Tories said Darling's growth assumptions were "fantasy forecasts". They said debt repayments would equal the 43 billion education budget, while national debt would double to 1.4 trillion.

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