Chancellor: VAT's the way I hike it

GEORGE Osborne heaped a pile of pain on everyone in Britain yesterday with a 2.5 per cent hike in VAT.

The rise to 20 per cent from the start of next year was top of the list in the Chancellor's Emergency Budget - aimed at saving our debt-ridden nation from ruin.

Shoppers will join state workers, banks and a host of benefit claimants in being clobbered by a Budget that combined massive spending cuts with tax increases.

And the average household will be £400 a year worse off.

Mr Osborne delivered his first Budget with a grim face. And there were none of the customary smiles when he posed with his Treasury team outside 11 Downing Street for the traditional Budget box photo.

He told the Commons he had no choice but to deal "decisively" with Britain's record debts.

He said: "Our policy is to raise from the ruins of an economy built on debt a new, balanced economy where we save, invest and export.

"Today we pay for the past - and begin to plan for a brighter future."

Mr Osborne repeated time after time that the "tough but fair" measures were unavoidable due to the dire state in which Labour left the nation's finances.

The VAT hike will pump an extra £13billion a year into Treasury coffers. But all existing exemptions - on food, children's clothing, books and newspapers - will stay.

Capital Gains Tax was hiked to 28 per cent for higher rate taxpayers from midnight.

But to placate furious Tory backbenchers, it was far less than the Coalition Government initially promised. And it was frozen at 18 per cent for everyone else.

The cost of car, house and travel insurance will rise next year after a tax on everyday policies was raised from five to six per cent. And banks and building societies will be hit with a new levy to raise £2billion a year.

In a Budget viewed as the most significant for 30 years, the Chancellor boldly outlined a five-year plan to virtually eradicate our crippling £155billion deficit.

Three-quarters of the measures will come from spending cuts and a quarter from tax rises.

Mr Osborne promised to protect the vulnerable. And with all the measures taken into account, including Labour's last round of tax rises, Treasury statistics revealed the rich will take on MORE of the burden.

The highest-earning households on more than £49,700 a year will have to fork out an extra £1,600, or two per cent of their income. The lowest earners will pay less than £200 more, or 1.25 per cent. Turning to spending cuts and benefits reform, the Coalition launched a surprise move by swiftly attacking over-dependency on welfare handouts.

Mr Osborne also froze public sector wages for two years for all but the lowest paid.

And to save another £17billion, every ministry apart from Health and International Development will have to deal with budget cuts of a whopping 25 PER CENT.

Details of where the axe will fall will be announced in October. But Defence and Schools will have to trim less than others, giving troops and teachers some respite.

Even the Civil List payment to the Queen was frozen at £7.9million. And from now on the Royals' cash will be fully scrutinised by the National Audit Office. The belt-tightening is expected to trigger a 20,000 rise in the jobless total. But it is expected to fall next year.

Tory leader David Cameron emailed supporters to admit the Budget would "possibly" cost the Government some popularity. But he added: "It is the right thing to do for the future of our country".

Deputy PM Nick Clegg told Lib Dems all the party's key fairness policies had been implemented.

But the first hint of revolt came last night when Left-wing Lib Dem MP Bob Russell said he could not support a VAT hike.

Labour and the unions condemned the cuts as "reckless," warning they will threaten the recovery.

But the Opposition concentrated its assault on the Lib Dems. Acting Labour leader Harriet Harman said: "They have sacrificed everything they have stood for to ride in ministerial cars and on the coat-tails of the Tory government."

TUC General Secretary Brendan Barber said: "We are very definitely not all in this together. Those on middle and low incomes have done worse than expected. And the rich have been let off much of what they feared."

But markets warmly welcomed the new economic blueprint.

Credit agency Fitch said it would "underpin" Britain's crucial AAA rating.

Businesses were also happy, with Marks & Spencer chairman Sir Stuart Rose calling it "firm, fair and well balanced".

t.newtondunn@the-sun.co.uk