Tough talk in budget

A surprise increase in national insurance payments for millions of middle-income Britons was prescribed by chancellor Alistair Darling yesterday as he set out the government's cure for a post-public spending boom hangover in his Pre-Budget Report.

A new austerity programme will feature a two-year pay rise cap of 1pc on all annual public sector settlements, and an overall expenditure clampdown so tough that even the NHS, the jewel in Labour's crown, will be subjected to a four year freeze on resources in real (inflation-adjusted) terms.

But the pain will be delayed. Virtually none of it will be inflicted before 2011. And the prime minister and Mr Darling are hoping that this will help the government to survive an election campaign in which they will keep emphasising that Tory medicine will cause even more anguish.

The Conservatives accused the government of putting off necessary decisions because of the election. They nonetheless condemned the national insurance increase as an attack 'on the many and not the few', and suggested that anyone earning over �20,000 a year was now under 'class war' fire from ministers. But though shadow chancellor George Osborne told the Commons that “every family in the country is going to be forced to pay for this prime minister's mistakes”, they refused to give an outright commitment to reversing the national insurance rise if they win power in the election.

The PBR also featured a one-off 50pc super-tax on individual discretionary bank bonus payments of more than �25,000. Mr Darling made a “cautious” estimate that this would yield �550m for the Exchequer. But while casting great doubt on that, the Conservatives did not condemn the principle of the move. It was unacceptable for banks propped up by the taxpayer to make large bonus payments, they said.

The government is committed to halving the public sector borrowing requirement - which has soared to an estimated �178bn in the current financial year - over a four-year period ending in 2013-14.

To achieve that, said Mr Darling, he would have to raise all employer, employee and self-employed rates of national insurance from April 2011. It will effect people earning more than �20,000, and someone on �30,000 will pay �45 a year more in tax - which will be on top of an extra �45 on national insurance as a result of last year's PBR. The new move will raise �3bn a year from 2011-12.

As the CBI and Institute of Directors condemned the national insurance change, and spokesmen for the financial sector said the bank tax could drive people out of the City of London, the TUC attacked the new crack-down on public sector pay.

The government also faces much hostility from traditional supporters to the general squeeze it has proposed to apply to the public sector from 2011.

After allowing public spending to rise by 2.2pc in real terms in 2010-11, the government would subject it to four years of tight constraint. Overall real growth of only 0.8pc a year would be provided for, and the curb would be tougher than that suggests.

Though virtually all NHS spending would be given special protection, it would be permitted only to stand still in real terms. For an institution that has been consistently fed big real terms budget increases since 1997 - of as high as 10pc a year - this would be an immense culture shock.

There would be low real terms increases - of under 1pc a year - in school funding, and expenditure on policing would also have ring-fenced protection. But some departments could be subjected to deep cuts of 5pc or more a year. The 0.8pc total spending figure gives a seriously misleading impression because it includes increases in welfare payments not within departmental limits.

In trying to win the election despite the warnings of economic pain to come - and there was heighted speculation at Westminster yesterday that Mr Brown could treat the PBR as an early Budget and go to the country as early as March - the government will repeatedly tell the electorate that Tory measures would be more severe. It will also keep pressing David Cameron and Mr Osborne to spell out what action they would take.

After acknowledging that he now expects the British economy to contract by 4.75pc this year, and that the national debt will increase to an estimated �1.47 trillion - almost 78pc of national income - by 2014-15, Mr Darling was jeered by the opposition when he said he was setting out his plans “from a position of strength”.

Liberal Democrat Treasury spokesman Vince Cable said the chancellor had ducked the hard choices on spending and cuts.

As well as the curbs on public sector pay, Mr Darling announced that contributions from the state to the pensions of teachers, local government and health workers and civil servants would be also capped.

The senior civil service pay bill would be cut by up to �100 million over three years with any new government appointment over �150,000 and all bonuses over �50,000 requiring Treasury approval.

Mr Darling gave Labour MPs something to cheer about with the announcement of a 2.5pc increase in the state pension next year - and there was laughter when he followed it with a cut in bingo duty.

He also confirmed a raft of heavily trailed green measures including a scrappage scheme for inefficient boilers, and he froze the individual inheritance tax allowance at �325,000.

A further �2.5bn was set aside for military operations in Afghanistan next year.