The Budget: Well-off take the pain as Osborne hikes tax

• From left, Chief Secretary to the Treasury Danny Alexander, PM David Cameron, Chancellor George Osborne and deputy PM Nick Clegg at No 10 yesterday. Picture: PA

In the Budget, described as "tough but fair", the Chancellor will raise the threshold for paying tax by 1,000 to 7,475, The Scotsman understands.

The move would give each earner an extra 200 a year in their pocket from April 2011.

But analysts say this would be wiped out if, as many experts believe, Mr Osborne also increases VAT from 17.5 per cent to 20 per cent at an estimated 425 annual cost to each household.

It is also expected that Mr Osborne will announce that capital spending on projects such as schools and hospitals will not be cut further. It is understood this is because he wants to protect construction jobs and losing these projects disproportionately hits lower- and middle-income earners.

The move will mean that money for capital projects in Scotland will also be ringfenced, because of the Barnett Formula, but the Scottish Government will decide how it is spent.

In an attempt to see off criticism over the "unfairness" of his Budget, Mr Osborne will become the first Chancellor to publish a breakdown of how individual income groups are hit.

It is understood that this will show that wealthier groups, possibly those earning 60,000 and upwards, will bear the burden of much of the pain.

He has already made it clear that Labour's planned increase in employer contributions to National Insurance will be cancelled at a cost of 6 billion.

However, there was a dire warning yesterday from Mr Osborne's predecessor that the fairness of the Budget would be in the detail.

In a briefing to journalists in Westminster, Alistair Darling claimed he expected some money-saving ideas rejected by him in office to appear, to help plug the gap.

These will include a measure to wipe 1bn from the 100bn welfare bill by linking increases to a lower rate of inflation. Currently, it is linked to the retail price index (RPI), which gives better rates of increase than the consumer price index (CPI).

He also suggested that Mr Osborne would have to increase VAT to 20 per cent. And he said he would be "looking out for any delay" until after September.

However, it was on the cuts and strategy for further slashing public spending that Mr Darling was most concerned.

He again pointed out that the 155bn deficit was 30bn less than expected and warned that there was a danger of Britain tipping back into recession as a result of excessive cutting.

He said: "No-one's arguing about whether you get the deficit down, what they are arguing about is policies that go further and faster, ones that appear to be driven by an ideological war against the public sector.

"My worry is that they seem to be oblivious to the fact that if you cut and you don't have a counterbalancing strategy for growth, you will get into the problems that we're now beginning to see in Europe."

The Tories were using the economic situation as a "cover" for policies to which they were always committed, and were using the Lib Dems as a "front" to make them acceptable, he said.

But there were concerns from other quarters that additional tax rises could prove to be more of a problem.

Many analysts now expect VAT to rise to 20 per cent, despite the Tories denying this during the election and the Lib Dems running an anti-Conservative campaign warning of "the VAT bombshell".

However, the move would bring the UK more in line with the rest of Europe, while it would raise an additional 11.4bn, bringing the total tax take from VAT to 91.29bn, according to comparison website Kelkoo.

But it would cost the typical household an average of 1.16 a day, or 425 a year, and reduce their spending power by about 1.25 per cent a year.

The move would add about 2.5p to a litre of petrol and 7p to a pint of lager, while big-ticket items, such as a Ford Focus, which would previously have sold for 17,945, would be 383 more expensive.

In addition, it is expected that there will be increases in capital gains tax, a move to which Mr Darling gave some support, if it was a measure to clamp down on income tax avoidance.

But the well-trailed potential increase in capital gains has been greeted with a chorus of disapproval from the Tory Right, including former Scottish secretary Lord Michael Forsyth and John Redwood.

And there was a warning that raising VAT could hit businesses.

Bruce Fair, the managing director of Kelkoo UK, said: "With a projected 2.4bn gap to plug through higher taxation, VAT seems like an obvious choice.

"However, as with all tax increases, there will be repercussions for consumers, retailers and the economy."

What he should do – the experts' view

Dave Prentis: Protect the public sector

THE coalition government seems determined to attack public spending, vital services and public-sector pensions – regardless of the economic consequences.

We need a Budget that stands up for public services, the people who provide them and the poor, the sick and the vulnerable who rely on them for support.

Adding public-sector workers to the growing numbers out of work will cost the country dear – 6.6bn in lost tax revenue, as well as piling 8.8bn on the benefits bill.

A "Robin Hood" tax on banks would raise an estimated 30 billion a year and would go a long way towards digging this country out of recession. The people responsible for causing the economic crisis should pay to end it.

Dave Prentis is general secretary of the public sector union Unison

David Lonsdale: Balance needed for recovery

THE key thing for us is that we have a Budget that balances the books and balances public finances.

There's a need to set out measures to restore growth and to maintain capital expenditure.

Capital projects and infrastructure investment are also needed. Another key thing for us is ensuring that there are not taxes on business, which would hamper investment and growth. A move towards restoring the competitive nature of the UK's tax system is also needed.

Low-tax principles have been eroded to some extent, and we need to move back towards them. Although it would be unrealistic to expect tax cuts now, there's a need to give a clear signal by saying what the likely headline rate of corporation tax will be.

David Lonsdale is the assistant director of CBI Scotland

Jenny Stewart: Public-sector cuts needed

BY NOW it is clear that Chancellor George Osborne will announce steep tax rises and outline horrendous spending cuts. The good news is that the government is taking the task to reduce the enormous budget deficit seriously.

But the challenge will be to use this Budget as a platform to set out a blueprint for a radical public-sector reform.

The Chancellor will send a very stark message to the public sector – that public-services provision, as we know it, is not sustainable any longer.

If we are to avoid swingeing cuts in front-line services, big and bold steps will be required. We need an ambitious and radical programme of public-service reform to introduce much greater financial discipline to drive up productivity.

Jenny Stewart is head of public sector for KPMG in Scotland

Arthur Midwinter: Budget will damage economy

THE government's package of premature fiscal repairs will hamper recovery and damage public services.

The government plans to cut 4 in spending for every 1 raised in extra taxation. This will be unfair to low-income households, who depend most on public spending.

This is not a fiscal necessity. Britain's fiscal position is much better than governmental spin infers, and the deficit has already fallen by 21 billion since the Conservatives decided to cut 6bn this year during the election. They will be difficult to deliver in practice and will lead to crude cutting of budgets, rather than "waste". Frontline services will continue to be cut – not protected.

Professor Arthur Midwinter, University of Edinburgh, former adviser to the Scottish Parliament's finance committee.