Darling set to hit the better-off

Published on Saturday 5 December 2009 18:53

ALISTAIR Darling will this week unveil plans to target the better-off in a tax hike and announce cuts for the public sector when he sets out the financial battleground for next year's general election.

The Chancellor will announce a major change to his Inheritance Tax plans in his Pre-Budget Report and is considering imposing a windfall tax on bankers' bonuses.

But the Chancellor has postponed most of the pain until after the next election with his big spending cuts earmarked for the three years after 2011.

Scotland on Sunday understands that Darling will ensure that more people are eligible for Inheritance Tax, a move which will re-ignite Conservative claims that the Labour government is engaged in a class war against the wealthy.

The last mini-budget before the election will see the Chancellor freeze his plans to raise the threshold from 325,000 to 350,000 in April next year.

The development, which will result in all those whose estates are valued at more than 325,000 still having to pay the tax, contrasts with Conservative promises to raise the threshold to 1 million for individuals and 2m for married couples.

The Chancellor is also understood to be examining a windfall tax on the bonuses awarded by financial institutions, although a decision has yet to be made. "This is not something that we are ruling out," a Treasury source said. "There is certainly a recognition that people are outraged about the level of bonuses that are being handed out given the amount of taxpayers' support the banks have been given. There is a feeling that the Chancellor wants to do what he can."

The prospect of a windfall tax comes after anger over the Royal Bank of Scotland's directors threatened to quit if they were not allowed to hand out huge bonuses to their staff. It also follows the revelation that taxpayers are propping up banks to the tune of 850 billion – more than 5,500 for every family in the UK.

The Chancellor will also attempt to appease the Bank of England's governor, Mervyn King, who last month claimed Britain lacked a "credible strategy" for clawing back its 175bn deficit. Darling will announce public spending cuts across all government departments while attempting to protect frontline health services, teachers and police forces from the efficiency drive. His projection of a 175bn deficit forecast in the Budget this year will be raised slightly but is expected to be kept well within 200bn.

When he stands up in the House of Commons on Wednesday, Darling is expected to confirm his commitment to halving the deficit over the next four years by saying that greater efficiencies will be required right across government.

He will also signal that tax rises will be required in the future. "Some of this can be done by greater efficiency across the board, but a quarter of that will be through tax rises. All departments will have to bear some pain and we are looking right across government to make savings, but frontline services are going to be protected," the source said.

But the worst of the pain is unlikely to be felt until well after the election with his plans calling for 8.6 per cent cuts to government departments in the three years after 2011.

With Britain suffering the embarrassment of being the last major economy to come out of recession, Darling will also attempt to pull off a balancing act by channelling what resources he has into boosting the economy in the short term.

That will include extending the initiative he announced in his most recent Budget to help the unemployed. Earlier this year Darling provided 1.2bn to give the 300,000 18 to 24-year-olds out of work for a year a job, a placement or training.

Darling will announce the scheme is to be extended to those who have been out of work for six months, doubling the number of young people in line to benefit.

Other economy-boosting measures such as low interest rates, housing support and the Bank of England's quantitative easing money creation scheme will be kept in place. "If we start withdrawing these too soon, then we will risk the recovery," the Treasury source said.

Despite these measures, Darling will predict that growth will be slow, at just 1.5 per cent for 2010.