Britain’s Labour government on Wednesday unveiled plans to ramp up taxes on the rich and rein in public spending as its chancellor of the exchequer Alistair Darling confirmed a huge increase in borrowing to restore the public finances, which are in their worst state since the second world war.

Announcing plans to raise the top rate of income tax from 40 per cent to 50 per cent next year for those earning more than £150,000, Mr Darling said the move was part of a “fairness” agenda which would see the wealthy help support the poor.

However, the move is a significant blow to the UK’s keenly guarded image as a lower-tax economy capable of attracting the best foreign workers, particularly to its financial hub in the City of London.

Figures from PwC showed that as a result of the change the UK has dropped from second place to sixth place among G7 countries in the percentage of salary that the highest earners get to keep after tax. Of the G7 nations only Italy remains below the UK.

A rise from 40 per cent to 45 per cent had been foreshadowed but the extra increase took politicians by surprise and was seen as a largely political move to sharpen the dividing line between the government and a resurgent Conservative opposition that currently enjoys a commanding lead in the opinion polls.

The move and other tax rises on those earning six-figure salaries will raise a relatively modest amount – about £2bn (£2.9bn) – and therefore do little on its own to help plug the gap in the public finances.

In his annual Budget speech, Mr Darling forecast that the British economy would contract by 3.5 per cent in 2009, although he expected growth to resume “towards the end of the year”. The economy would then expand by 1.25 per cent in 2010 and at an annual rate of 3.5 per cent from 2011.

His forecasts are more optimistic than the market’s consensus and the International Monetary Fund’s latest estimates.

During the past decade, Gordon Brown, prime minister, has boasted of ending Britain’s boom-to-bust economic cycle and of turning the country into the most vibrant economy in Europe.

However, Mr Darling warned that public borrowing would reach a postwar high of £175bn this financial year, or 12.4 per cent of gross domestic product, falling to £173bn next year. Public sector net debt will almost double to 79 per cent of national income by 2013. It is not expected to fall until 2015-16.

Mr Darling said the current public deficit was “set to halve within four years”, and outlined a cut in real spending growth on public services from 1.2 per cent to 0.7 per cent from 2011 in order to restore confidence.

“There are no quick fixes. There are no overnight solutions,” Mr Darling said.

Mr Darling said the provision for the cost of a banking bail-out and intervention measures would be more than £50bn, at 3.5 per cent of gross domestic product.

David Cameron, leader of the opposition Conservative party, said Mr Darling had written himself into the history books with “a whole chapter in red ink”.

Other measures to raise revenues include raising the duty on alcohol and tobacco by 2 per cent.

Mr Darling said the tax rises would deliver an extra £6bn in revenues by 2012.

He also used the Budget to commit the government to cutting carbon emissions by 34 per cent by 2020, and offered additional funding for energy efficient homes and buildings. There was also funding for green manufacturing.

The government confirmed it would implement a car scrappage scheme next month, paying buyers of new cars £2,000 if they dispose of cars that are more than 10 years old. The scheme will run until March next year.

The chancellor said previous cuts in income tax and VAT along with higher pensions and capital spending were “protecting thousands of jobs”. Meanwhile, the boost provided by fiscal and monetary policy, lower oil prices and weaker sterling was expected to protect 500,000 jobs, Mr Darling said.

Everyone under the age of 25 who has been out of work for 12 months would get a job or training, and the government was working with employers to provide an additional 250,000 jobs.

The chancellor extended extra tax credits for children and the disabled, and promised to allow grandparents of working age to count care for their grandchildren towards their state pension.

Continuing his efforts to boost to the housing market, Mr Darling extended the stamp duty holiday for properties sold for less than £175,000 to the end of the year.

He also sought to encourage spending by businesses through doubling the capital allowance for businesses this year to 40 per cent, in an effort to encourage companies to bring forward investment.

For savers, he raised the allowance on tax-free savings to £10,200 from £7,200 for those over 50 from this year, and for everyone else next year.

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