Budget 2010: George Osborne defends 'tough but fair' tax rises

George Osborne has defended his drastic Budget as "tough but fair" and suggested Britain faces a choice between cuts to welfare or departmental spending.

The Chancellor said "everyone in our society has had to make a contribution" and that he had "tried to be as fair as possible".

He also insisted the coalition had "a democratic mandate" for the rise in VAT to 20 per cent despite assurances during the election campaign that the Conservatives had no plans for such an increase.

He told BBC Radio 4's Today programme that Whitehall departments would not have to reduce expenditure by the planned 25 per cent if there were further welfare savings identified.

"If over the coming couple of months we can find further savings in the welfare budget, then we can bring that 25 per cent number down," he said.

"In the end, that is the trade-off not just between departments but also between the very large welfare bill and the departmental expenditure bill.

"That's why we are having this big public engagement through the spending review process so that as a country we can come to that decision collectively."

Prime Minister David Cameron and Liberal Democrat Deputy PM Nick Clegg will appear on television together today to show a united front amid criticism, particularly from Liberal Democrat MPs, over the extent of the changes. Treasury documents show that, by the end of this parliament, taxes will have gone up by £29 billion a year.

Mr Osborne insisted the possibility further and faster action on the deficit was aired throughout the election campaign and "both the Conservative Party and the Liberal Democrats made the argument that it needed to happen".

"We were not thinking seven or eight weeks ago we are definitely going to go ahead with VAT. We wanted to keep options open, which is why we didn't rule it out, and the reason you kept asking that question was because we weren't ruling it out," he said.

"And it was only when we saw the public finance and we got the independent assessment of the structural deficit that we decided we had to go ahead with the VAT rise."

Mr Osborne also appeared on GMTV, where he had to listen to angry and anxious messages from viewers about his Budget announcements.

"The damage to the economy, the people losing their jobs, will come if we do not sort out our problems in this country, and the welfare bills have got out of control," he said.

"The hole in the public finances was so great and the debts were so large, and people at home know, if you have got a debt problem, you have got to deal with it."

Danny Alexander, the Liberal Democrat Chief Secretary to the Treasury said increasing VAT to 20 per cent – a move his party vigorously opposed in the general election campaign – was "the unavoidable choice".

However, Alistair Darling, the shadow Chancellor, said the coalition was taking a "huge risk" by cutting public spending so quickly.

"I'm very concerned, and I'm not the only one – there are a number of commentators and others who are extremely concerned that this Government is taking a risk," he said.

"Also, they announced a whole screed of stuff yesterday and, as the days go by, I suspect some of the small print will reveal one or two horrors that aren't immediately obvious.

"With a coalition Government and a flaky set of partners like the Liberal Democrats, I just wonder whether they will be able to deliver some of this stuff."

In a 55-minute speech to a febrile House of Commons, Mr Osborne outlined a package of drastic measures he said was designed to pay for Labour’s “past irresponsibilities”.

He announced that, in October, Whitehall departments would be hit with cuts of 25 per cent or more to their budgets.

VAT will rise from 17.5 per cent to 20 per cent in January, raising almost £13 billion in extra tax a year. Up to 700,000 people face paying the higher rate of income tax after the threshold was lowered, while National Insurance will increase for higher-rate taxpayers.

Some 600,000 middle-income families will lose out on child tax credits and child benefit is to be frozen for three years. Millions of public-sector workers face an effective pay cut after having their salaries pegged for two years.

Capital gains tax will be raised from 18 per cent to 28 per cent for higher-rate taxpayers, a move aimed at raising almost £1 billion from investors. However, the announcement represents a partial climb-down by Mr Osborne, who had been ready to impose a higher rate.

Banks will be charged a £2 billion-a-year levy, a move matched by France and Germany.

The Speaker was forced to call for order in the House when the Chancellor disclosed his planned VAT rise.

According to Treasury figures, every household will be worse off as a result of tax rises and benefit changes. Those earning more than £49,700 a year will be £1,600-a-year worse off within two years. Those on average incomes will be around £400 a year worse off.

Even the lowest earners – those with incomes of less than £1,800 a year – will be on average £180 worse off as a result of higher VAT and cuts to benefits.

Mr Osborne told jeering Labour MPs: “The years of debt and spending make this unavoidable. This single tax measure will by the end of this Parliament generate over £13 billion a year of extra revenues. That is £13 billion we don’t have to find from extra spending cuts or income tax rises.”

Mr Osborne’s bolder than expected austerity measures appeared to reassure the City. After recent fears that Britain could have its top credit status downgraded, the leading ratings agency Fitch welcomed the tough measures set out by the Chancellor.

David Riley, the head of sovereign ratings at Fitch, said: “Our preliminary assessment of today’s Budget is that it sets out an ambitious deficit reduction path that, if delivered upon, will materially strengthen confidence in UK public finances and its AAA status.”