Chancellor says steep hike in VAT to 20pc is unavoidable

Banks relieved as £2bn levy is more lenient than expected

Public sector braced for massive job losses as spending slashed

Higher rate of CGT increased to 28pc – lower than feared

Income tax break worth £200 for low and middle earners

Headline rate of corporation tax to fall to 24pc by 2014-15

GEORGE Osborne unveiled the toughest Budget in Britain’s peacetime history yesterday, announcing swingeing public spending cuts and painful tax hikes.

The chancellor said plans to increase VAT to 20 per cent from next January while slashing most departmental budgets by 25 per cent were “unavoidable” because of the perilous state of the public finances.

Businesses welcomed plans to cut the headline rate of corporation tax by one per cent every year until it hits 24 per cent in 2014-15, while a £2bn levy on banks was also less onerous than expected.

And Tory backbenchers celebrated a partial victory after the chancellor increased capital gains tax for higher rate payers to 28 per cent – far lower than the 40 per cent rate many were fearing.

In a bid to prove the Budget was “tough but fair”, Osborne kept all of Labour’s rich-bashing measures in place and heaped even more pressure on the wealthy.

“This is a new Conservative government, not like the Budgets of the 1980s,” an aide said. “We have managed the biggest peacetime fiscal consolidation this country has ever seen, while ensuring the rich contribute the most as a percentage of their income.”

A £1,000 increase in the income tax threshold will hand a £200 tax break to 23m taxpayers, while bringing almost 1m out of the income tax system altogether.

But the chancellor said the threshold for higher rate payers would be lowered by £1,500 in 2011-12, meaning those earning over £42,375 per cent will pay tax at 40 per cent.

And the level will be frozen for three years, dragging hundreds of thousands of taxpayers into the higher bracket. Those earning over £100,000 – who were hit with reduced personal allowances in the previous Budget – will pay an extra £500 a year in tax.

Despite the higher taxes, the chancellor will deliver the huge £113bn fiscal consolidation by 2014-15 with a combination of around four parts spending cuts to one part tax rises.

That will mean swingeing spending cuts, with an extra £32bn of cuts on top of the £44bn that were already pencilled in by the previous government.

Whitehall departments will see their budgets slashed by an average
of 25 per cent, but spending on health and overseas aid will be protected.

And Osborne is taking an axe to benefits, announcing £11bn of reductions to the massive £180bn welfare bill. The government will link benefits, tax credits and public sector pensions to CPI instead of RPI from 2011-12, saving almost £6bn by 2014-15. Aides said there were likely to be even more welfare cuts in the pipeline.

The chancellor said the measures would deliver a balanced budget and falling national debt as a share of GDP by the end of the parliament, and staked his reputation on whether he can slash public sector jobs and spending without derailing the recovery.

The independent Office of Budget Responsibility agreed the austerity measures would have little impact on Britain’s growth prospects. It said the economy would grow by 1.2 per cent this year; 2.3 per cent in 2011-12; 2.8 per cent in 2012-13; 2.9 per cent in 2013-14 and 2.7 per cent in 2014-15.