'Tough but fair' Osborne defends cuts

George Osborne has insisted his emergency Budget of spending cuts and tax rises is "tough but fair".

The Chancellor raised VAT to 20 per cent, a move expected to bring in an extra £13.5 billion. But there will be no extra rise in duties on fuel, tobacco or alcohol.

Child benefit will be frozen for three years and tax credits cut for families earning over £40,000 a year. Mr Osborne also said he would wipe £1.8 billion a year off the housing benefit bill by the end of the Parliament, capping weekly payments at £400. The total welfare shake-up will save the country £11 billion by 2014/15.

As a sweetener, personal allowances for basic rate tax payers will go up by £1,000 to £7,475 from next April, taking 880,000 of the lowest paid out of income tax altogether.

The public sector pay freeze will be extended for two years for staff on £21,000 or more. The 1.7 million public servants who earn less than £21,000 will receive a flat pay rise worth £250 in both years. And Government departments whose budgets have not been ring-fenced would face spending cuts of 25 per cent.

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.

Mr Osborne said: "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."

The Chancellor said the government would accelerate the increase in the state pension age to 66.

He 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 per cent and 2.3 next year, compared to its previous forecasts of 1.3 per cent and 2.6.

However, he said that from 2012 growth would pick up to 2.8 per cent, then 2.9 and 2.7, as against previous OBR forecasts of 2.8 per cent, 2.8 and 2.6.

Turning to the banking sector, the Chancellor said the Government was taking the initiative globally by introducing a bank levy from January 2011 which was expected to generate over £2 billion annually.