Osborne set for painful budget

■ Chancellor to announce tax hikes and spending cuts

■ Ex-Labour minister appointed to review public sector pensions

■ Bank levy set to raise “considerably more” than £1bn

THE chancellor will deliver the toughest Budget in almost 30 years tomorrow with a mixture of swingeing public spending cuts and painful tax hikes.

Yesterday, he warned the public to expect “tough but fair” measures.

In a sign that the chancellor is ready to tackle vested interests in the public sector, he appointed former Labour minister John Hutton to lead a commission into public sector pensions.

“The public sector pension bill is unsustainable and we do have to tackle it,” said Osborne.

Hutton was immediately branded a “collaborator” by former Labour deputy leader John Prescott, who accused him of helping the coalition to dismantle state pensions.

Others said Hutton’s appointment could well lead to a pensions levy being imposed on recipients of public sector pensions.

The chancellor is hoping that by introducing the most unpopular measures early on, he can convince the public he is paying for 13 years of Labour’s economic mismanagement.

Osborne will hammer the banks with a new levy on their balance sheets, and coalition sources yesterday suggested he now expects to raise “considerably more” than the £1bn that was originally mooted.

High earners are expected to shoulder a large proportion of the fiscal tightening. There are fears that the top rate of pensions tax relief will be changed while the 50p rate will stay.

And despite a series of high-level campaigns against an increase in capital gains tax (CGT), including one in this newspaper, the chancellor is expected to hike rates on “non-business assets” with a series of reliefs for entrepreneurs.

Families earning over £40,000 will see their benefits slashed while the majority of public sector workers will take a pay freeze for two years.

An increase in VAT is also widely expected. The chancellor could raise some £4.5bn a year by adding 1p to the existing 17.5 per cent rate.

Vice taxes on alcohol and cigarettes will will be hiked, along with new taxes designed to make people more conscious of the environment.

There will be a handful of sweeteners, with an increase in the income tax threshold, while businesses will broadly welcome plans to lower corporation tax.

The threshold for employer National Insurance contributions will also be increased in a bid to kick start a private-sector recovery, while firms in areas where huge swathes are employed by the public sector will be given tax breaks.