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Alistair Darling has said the UK will have to borrow a record £175bn as he admitted the economy faces its worst year since the Second World War.
The chancellor tore up a key New Labour election pledge by unveiling a new 50p tax rate for earnings over £150,000.
He also cut future spending plans in a Budget which added 2p on fuel, 1p on a pint of beer and 7p on cigarettes.
The package would steer the UK through to recovery, he said. The Tories said the economy was in an “utter mess”.
Leader David Cameron said not enough had been done to get spending under control and “Britain simply cannot afford another five years of Labour”.
KEY POINTS
- 50% tax rate for earnings over £150,000
- Big debt and deficit increases
- Economy shrinks at record rate
- Public spending squeeze planned
- Books not balanced until 2018
- 2p on fuel, 1p on a pint of beer and 7p on cigarettes
- £15bn public sector ‘efficiency savings’
- Claw back tax relief on top earners’ pension
- £2bn help for young unemployed
- £1bn to boost housing market
- £2,000 car scrappage scheme
Total government debt will double to 79% of GDP by 2013 - the highest level since the Second World War. The annual budget deficit will rise sharply to £175bn for the next two years.
The Budget received a cool reception in the City with the pound down - and the Confederation of British Industry said it did not set out a “credible and rigorous” path to recovery.
Liberal Democrat leader Nick Clegg said the government “have condemned us to years of unemployment and decades of debt” and claimed Labour had been “desperately rushing around picking up half-baked ideas to save the skin of this failing government”.
The new top rate of tax is a change of plan from the pre-Budget report last year in which Mr Darling had proposed a new tax rate of 45%.
It is also being brought in a year earlier than planned “to pay for additional support for people now”.
Mr Darling also scrapped tax relief on top earners’ pensions.
BBC Political Editor Nick Robinson said Labour had ditched its manifesto pledge not to raise income tax before the next election in an effort to “wrongfoot” its opponents and cheer its core supporters, as well as raising money.
In other Budget measures, fuel duty will increase by 2p per litre in September and then by 1p a litre above inflation each April for the next four years.
BUDGET 2009
Alcohol duties will go up by 2% - about 4p on a bottle of wine and 13p on a bottle of spirits - from midnight.
Mr Darling said the various tax raising measures would raise more than £6bn by 2012.
That would help pay for a real terms boost in pensioners’ income - including new pension recognition for grandparents who care for their grandchildren - and help for savers with ISAs.
There will also be a “car scrappage” scheme under which people trading in cars older than 10 years for new ones will get £2,000 to boost the ailing motor industry.
Jobs
And there will be more help to get people back into work quickly and support businesses and homeowners facing problems.
Everyone under the age of 25 out of work for 12 months or more will be offered a job or a place on a training scheme. In addition, the government will create or support up to 250,000 jobs in deprived areas.
Find out the key words used by Alistair Darling in his Budget speech.
Another widely trailed measure confirmed was the extension of the Stamp Duty holiday on properties sold for less than £175,000 until the end of the year as part of a £1bn package aimed at boosting house sales and building.
In his speech, Mr Darling confirmed the economy would shrink by 3.5% in 2009 - far worse than his pre-Budget forecasts.
Public borrowing will also soar to record levels as the Treasury wrestles with a combination of falling tax receipts, higher spending and the cost of bank bail-outs.
But Mr Darling insisted other major countries were suffering a worse downturn.
Spending squeeze
He said the Budget would “build on the strength of the British economy”.
The government had been “guided by our core values of fairness and opportunity - and our determination to invest and grow our way out of recession”.
But he also made clear his recovery plans depended on a rapid economic bounce-back - with a forecast of 1.25% growth next year rising to 3.5% in 2011.
The Treasury will also bid to close the gap between dwindling tax receipts and soaring spending by selling £220bn in gilts, or government-backed debt - a new record.
BUDGET FORECASTS
- Growth - Minus 3.5% in 2009, rising to 1.25% in 2010 and 3.5% in 2011
- Debt - Doubles to 79% of GDP by 2013
- Deficit - Rises to £175bn for two years before falling to £97bn in 2013/14
And he admitted that the economy would first face a period of deepening deflation with the Retail Price Index falling to a low of minus 3% by September.
The chancellor is also squeezing public spending in the future by saying it will grow by only 0.7% per year from 2011 - a lower growth rate than when Mrs Thatcher was in power.
Despite this the public finances will only balance by 2018 - two years later than previously forecast.
There was also grim news on the jobs front ahead of the Budget, with unemployment figures showing the number of people looking for work has reached 2.1 million - its highest level since Labour came to power in 1997.
The government claimed Scotland would get an extra £104m from the Budget but the SNP said it would mean “a real terms cut in Scottish spending” of £500m that would cost 9,000 jobs.
The Welsh Assembly Government says it is facing a cut of more than £400m in its funding for next year. Opposition parties have called it “a huge blow” and warned that it will have have a major impact on frontline services.
