April 22, 2009 8:25 pm

Labour breaks promise on taxing rich

The Labour government on Wednesday lifted the top rate of income tax to 50 per cent, ripping up a central promise of its 2005 election manifesto and drawing a clear ideological dividing line with the opposition Conservative party.

In a highly political Budget, Alistair Darling, the chancellor, cited “fairness” as his motivation for raising income tax from next April for people earning more than £150,000 a year, cheering many Labour MPs.

However, the move alarmed some Blairite Labour MPs, for whom the promise not to penalise the wealthy has been an article of faith. “Alistair should have made it clear this was just a temporary measure,” said one.

Although George Osborne, shadow chancellor, said he would not immediately revoke a series of tax rises for the wealthy, he said the Tories had a clear preference for “spending restraint over tax rises”.

Mr Darling’s Budget will hit earners above £100,000 who will have their personal allowance removed and cut tax relief for pension contributions for those earning over £150,000. The new 50p rate replaces the 45p top rate, planned for 2011.

Although the measures fall far short of the promise by Denis Healey, former Labour chancellor, to squeeze the rich until the “pips squeak”, they will typically raise taxes by between £2,000-£4,000 for high earners.

The new taxes on the wealthy – whose scheduled £2.2bn yield is questioned by tax experts – diverted attention from the much bigger political question raised by the Budget: how to contain record government borrowing.

The Tories and Liberal Democrats branded Mr Darling’s Budget “dishonest” over its claim that the economy would bounce back to 3.5 per cent growth in 2011, helping to restore order to the public finances.

“This wouldn’t be a U-shaped recover, this would be a trampoline recovery,” scoffed David Cameron, Tory leader.

SOAKING THE RICH Based on an executive earning £150,000, married with children and a mortgage of £750,000
  Income kept*
(%)
Japan 62.6
UK - Current (40%) 61.4
Germany 60.6
US 59.8
France 58.4
Canada 57.8
UK - Future (50%) 56.0
Italy 49.6
   
Source: PwC *Income after tax and social security contributions

But senior ministers were relieved the chancellor did not get more of a mauling from the opposition over the deteriorating finances. “It was almost like they were listening to a lecture,” said one cabinet minister.

Mr Darling’s bleak assessment of the national economy was laced with a repeated assertion that Britain should be “confident” about the future and a claim that the Budget was “investing for the recovery”.

Scarce resources were targeted at alleviating rising unemployment – especially among the young - in anticipation that the next election could be fought against a backdrop of a jobless total of more than 3m.

Mr Darling also found money for “green” technologies, including a boost for offshore wind power, and a fund to help companies operating in other areas of advanced technology.

A £2,000 incentive to trade in old cars for newer models – half funded by the car makers themselves – was approved, but motorists will pay more in fuel duty and beer and cigarette duties will also rise.

Mr Darling’s Budget also gave a hint of the pain to come in the public sector after the election, when he announced “efficiency savings” to cut public spending growth to just 0.7 per cent from 2011.

Gordon Brown saw the Budget as a key plank in his spring offensive - following the relative success of the G20 summit in London - but his aides admit that a series of “sleaze” scandals have badly soured the political and media mood.

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