Rise in VAT hot point of UK Budget

British Chancellor of the Exchequer George Osborne yesterday unveiled the toughest Budget in a generation, but claimed it was also "fair" despite a controversial rise in VAT, a big squeeze on benefit payments and a 25 per cent cut in most areas of public spending.

Despite his assertions, some Liberal Democrats questioned the Chancellor's claim to have delivered a "progressive Budget", warning that the hike in VAT from 17.5 to 20 per cent in January and massive spending cuts would hit the poorest hardest.

Osborne believes privately that his first Budget was the "easy bit" and that the real crunch will come over his demand for £32 billion ($67 billion) of new spending cuts, to be finalised by October, with Cabinet ministers and their officials trying to defend their turf.

The health and overseas aid budgets will avoid the axe, while the Chancellor hinted that education and defence would escape relatively lightly. But that means other departments face cuts of more than 25 per cent.

Yesterday's announcement includes an £11 billion reduction in welfare spending, including a squeeze on tax credits for families on middle incomes; a three-year freeze in child benefit; and the stipulation that all claimants of disability living allowance undergo medical assessments.

Housing benefit will be cut and most benefits will be raised in line with the consumer price index rather than the retail price index. This represents an effective cut in the annual increase of about 0.75 of a percentage point, which will eventually save £6 billion a year. Public sector workers earning more than £21,000 a year will have their pay frozen for two years.

The Chancellor sugared the pill by announcing that the income tax threshold would rise from £6475 to £7475 next April, that the basic state pension would be re-linked to earnings, and that £2 billion extra in tax credits would be extended to the poorest families so that child poverty would not increase.

The Chancellor also unveiled a £2 billion bank tax but limited the rise in capital gains tax from 18 to 28 per cent rather than the 40 per cent sought by the Liberal Democrats.

Osborne told MPs his measures were unavoidable after the coalition Government inherited a £155 billion public deficit from Labour.

Liberal Democrat leader Nick Clegg began the tricky task of selling the Budget to his party's MPs. He told them: "In the past, efforts to tackle a big deficit have always hit the poorest the most. The coalition has ensured that, for the first time, this will not happen. The richest will pay the most, while pensioners and children will be protected."

Dave Prentis, general secretary of Unison, accused the Government of "declaring war" on public services, adding: "This is the most draconian Budget in decades." Derek Simpson, Unite's joint general secretary, said: "Today the mask slipped to reveal this Government for what it is - Tory slashers of services and friends of the rich and powerful."

- INDEPENDENT