Osborne increases VAT to 20%
Chancellor George Osborne today announced a VAT hike to 20% in a Budget packed full of spending cuts and tax rises.
And he placed blame for the pain clearly at the door of the last Labour government, saying: "The years of debt and spending make this unavoidable."
He promised to balance Britain's books within five years as he used today's emergency Budget to rip into the inheritance left by Labour.
Outlining the cuts, Mr Osborne announced that the public sector pay freeze would be extended for two years for staff on £21,000 or more.
Piling on the pain, he said child benefit would be frozen for three years and tax credits would be cut for families with incomes over £40,000 a year.
He said government departments whose budgets have not been ring-fenced would face spending cuts of 25%.
The Chancellor also said the government would accelerate the increase in the state pension age to 66.
Mr Osborne said that he would wipe £1.8 billion a year off the housing benefit bill by the end of the Parliament, capping weekly payments at £400.
He also said the Government would introduce a medical assessment for Disability Living Allowance from 2013 for new and existing claimants.
The total welfare shake-up will save the country £11 billion by 2014/15, he said.
But there was a sweetener when he confirmed widely trailed plans to raise personal allowances for basic rate tax payers by £1,000 to £7,475 from next April, taking 880,000 of the lowest paid out of income tax altogether.
He also announced that from April next year the link between the basic state pension and earnings would be re-established.
Acting Labour leader Harriet Harman condemned the Budget,
She said: "This is a Tory Budget that will throw people out of work, that will hold back economic growth and will harm vital public services.
"It's the same old Tories."
But Mr Osborne insisted of his Budget: "Yes it is tough; but it is also fair."
And he pulled no punches about the state he said the last government left the economy in.
"This is an emergency Budget, so let me speak plainly about the emergency that we face.
"The coalition Government has inherited from its predecessor the largest budget deficit of any economy in Europe with the single exception of Ireland.
"One pound in every four we spend is being borrowed. What we have not inherited from our predecessor is a credible plan to reduce their record deficit."
And in comments that will be seen as a dig at former chancellor and prime minister Gordon Brown, who was not in the Commons, Mr Osborne said: "I am not going to hide hard choices from the British people or bury them in the small print of the Budget documents.
"You're going to hear them straight from me, here in this speech."
He said everyone would be asked to contribute.
"But in return we make this commitment. Everyone will share in the rewards when we succeed.
"When we say that we are all in this together, we mean it."
Among the measures Mr Osborne announced:
- a cut in corporation tax over the course of the Parliament from 28p to 24p.
- a bank levy from January 2011 which is expected to generate over £2 billion annually.
- no new increases in duties on alcohol, tobacco or fuel.
Mr Osborne also said he was reversing the previous Government's plan to increase the duty on cider by 10% above inflation.
He said the reduction will come into effect at the end of this month, joking that it would be "just in time to celebrate England's progress to the quarter finals, or else to drown our sorrows."
The Chancellor acknowledged that growth would initially be slower as a result of the Budget measures, but would pick up towards the end of the Parliament.
He said that the Office for Budget Responsibility (OBR) now estimated growth this year of 1.2% and 2.3% next year - compared to its previous forecasts of 1.3% of 2.6%.
However, he said that from 2012 growth would pick up to 2.8%, then 2.9% and 2.7%, as against previous OBR forecasts of 2.8%, 2.8% and 2.6%.
Borrowing this year is now expected to be £149 billion compared to an estimate of £155 billion under the previous government's plans.
It will then fall back to £116 billion, £89 billion, £60 billion, £37 billion, and £20 billion in the years ahead.