Budget 2009: Gordon Brown declares class war with tax on high earners

Gordon Brown has been accused of launching a "class war" against Middle Britain as he introduced a new 50 per cent top rate of tax to make the wealthy pay for the catastrophic state of public finances.

Casting aside more than a decade of New Labour ideology, the government broke a key election manifesto promise by announcing an increase in income tax for those earning more than £150,000.

Alistair Darling, the Chancellor, also announced that the highest earners will lose valuable tax breaks on pension savings, as part of a package of measures that will see the tax grab from high earners raising up to £5.5 billion a year - an average of £18,333 annually per person.

The surprise new measures - which mean Britain will have the highest top rate of any major economy in the developed world - came as Mr Darling was forced to lay bare the true extent of Britain's levels of borrowing in his Budget.

In the worst economic forecast since the Second World War, he said he planned to borrow another £700 billion over the next five years, taking the national debt to £1.4 trillion.

Mr Brown and Mr Darling were accused of indulging in party politics at a time of national crisis by seeking to exploit the divide the Tories' on tax policy.

It was also suggested that the Prime Minister was returning to Old Labour policies designed to shore up Labour's core vote ahead of an election next year that he is on course to lose.

Labour MPs in the party's heartlands will welcome the move and ministers will argue that taxing those on very high salaries is popular among many voters.

But in raising the top rate of tax the government risk alienating the middle class voters that swept Tony Blair to power in 1997.

Michael Fallon, the senior Conservative MP and member of the Treasury Select Committee, said: "This is undoubtedly a bit of class war from Gordon Brown. He is stoking up Labour MPs and the party faithful before the election but there is no doubt this is the end of New Labour.

"The higher rate of tax was a compact between both main parties. It was agreed that the certainty that the 40p rate gave was good, but that has now been shattered once and for all."

The new top rate of income tax will be brought in next April, before the likely May election. Gordon Brown had promised in the 2005 election manifesto not to raise to the top level of tax.

It led to fears that there will be a "brain drain" from Britain as higher earners are driven away by punitive levels of tax.

Mr Brown has consistently claimed to have ended "boom and bust". But the true state of public finances and the amount of government borrowing needed to repair them shocked many.

The Government first borrowed money in 1692. It took 300 years for the level of Public Debt to reach £165 billion in 1992, and yet is £175 billion this year alone. When Labour took office in 1997, debt was £350 billion.

Mr Darling - whose second budget co-incided with the release of figures showing unemployment had risen to 2.1 million - claimed that the government's books would be balanced within a decade.

But the Chancellor was accused of painting a rosy picture of how quickly Britain would return to growth. He told the Commons the country would be out of recession by the end of this year.

A report by the International Monetary Fund (IMF) suggested the British economy would continue to decline next year.

As a result it is feared the final borrowing figures could be even higher, since Mr Darling based his plans on an assumption that the UK economy will recover much more sharply than other economists believe.

After Mr Darling's 50 minute speech to the Commons failed to rouse the Labour benches, David Cameron, the Conservative leader, said Mr Brown was leading a "government of the living dead".

George Osborne, the shadow chancellor, said: "Labour is relying on optimistic growth forecasts that have been contradicted by the IMF, and their tax rises fall on the many, not just the few.

"Britain is being overtaxed to pay for Gordon Brown's incompetent overspending."

The Confederation of British Industry, the country's leading business group, also attacked the Budget for failing to grasp how Britain was going to recover from the recession. Richard Lambert, the CBI director general, said: "The key question for this Budget was whether it set out a credible and rigorous path for restoring the public finances to health. The CBI's preliminary judgement must be that it does not."

He said the Treasury had missed an opportunity to look at curbing public sector pay and pensions.

The move to a 50 per cent top rate of tax - which also effects income from share dividends - marks a departure from the era of New Labour in which Tony Blair and Mr Brown sought to woo Middle Britain by keeping the top rate of tax low. The 40 per cent rate was a staple of consecutive Labour manifestos.

Yvette Cooper, the Chief Secretary to the Treasury, tried to defend the move. She said it was the right response to "exceptional circumstances".

Asked whether the hike represented a breach of the 2005 General Election commitment not to raise the "basic or top rates of income tax in the next parliament", she said: "Well, it is. We never expected that we would have this kind of global financial crisis on a scale not seen for almost a century.

"In those circumstances, what we need to do is to make sure we are being fair."

Mr Darling hopes that the measure will raise £7 billion a year in five or six years time. But financial experts questioned whether the hikes would bring in the revenue predicted by the Treasury.

Robert Chote, director of the independent Institute for Fiscal Studies, said that the tax hike may actually lose the Exchequer money.

He said: "If you look at what happened when higher rates were last changed in the 1980s, that might lead you to suggest that such a move might actually lose you revenue, rather than gain it, as people actually declare less income for tax."

Sean Drury, of accountants PricewaterhouseCoopers, warned that the wealthy might decide to leave the country. He said that from next Spring the UK would rank 18th among the G20 economies in terms of income tax and social security rates for senior executives.

He added: "Countries like Switzerland will look increasingly attractive to some of the people in the key industries needed to lead the UK out of the recession.

Mr Darling had told MPs that he wanted the City of London to retain its status as a centre of financial services, but Stuart Fraser, policy chairman of the City of London Corporation, said the new higher rate could put the Square Mile at a disadvantage compared with financial centres overseas.

He said: "The new top rate of income tax at 50 per cent may damage the City's competitiveness - we operate in a global market for talent, and that talent is expensive."

David Cameron will now come under pressure from his own MPs to oppose the new 50p rate. The Tory leader attacked the move in the Commons, but he will not agree to reverse the measure if he wins the election.

Mr Osborne wants to make sure the next lection is fought on tax rises for the many - the proposed national insurance rise that his scheduled for after the election - and not tax rises for the few.

Source: The Telegraph