Super rich to pay for Osborne’s tax cutting

Mr Osborne will deliver what the Treasury described as a “big transforming Budget”, including the first moves towards regional public sector pay.

But the run-up to his speech was overshadowed by a warning from the Bank of England’s chief economist that overhauling the economy would prove more punishing and drawn out than many believed.

Spencer Dale also warned that borrowing costs paid by many households and companies might never fall back to pre-crisis levels, and that inflation might prove more stubborn than expected.

The coalition partners claimed credit yesterday for the Budget’s biggest item of spending, the more than £4 billion it costs to raise the income tax allowance from April next year. The decision puts the coalition on course to reach a year early its goal of lifting the threshold to £10,000 in this parliament.

The Lib Dems hailed the move as achieving their key aim, as set out by Nick Clegg at the start of the year. “It was our No 1 priority,” said one.

But after a protracted Budget negotiation that has at times been fractious, Tories were not prepared to let the Deputy Prime Minister take all the credit. “We agreed with it from day one, that’s why it’s in the coalition agreement,” one Tory said.

Lib Dem pressure for an annual levy on the owners of homes worth more than £2 million, the so-called mansion tax, has been rejected by Mr Osborne, as has Mr Clegg’s call for a squeeze on pension relief for the wealthy.

But Mr Osborne’s decision to introduce a new rate of stamp duty will be hailed by Lib Dems as a “mansion purchase tax”.

Mr Osborne will also use a fiscally neutral Budget that balances an overall cut in taxation with an overall cut in spending to place a cap on some of the many reliefs that allow the super-rich to avoid tax.

According to Treasury figures, hundreds of people who earn more than £1 million a year pay less than 20 per cent tax on their income. There are thousands of similar earners who pay less than 30 per cent.

The Lib Dems will claim that the move amounts to a “tycoon tax”, as championed by Mr Clegg, although last night the coalition partners were wrangling about whether Mr Osborne would use the term in his Budget speech.

The move will bring the Treasury a windfall in the “low hundreds of millions”, according to one source, a similar sum to be raised by a crackdown on stamp duty avoidance. Mr Osborne is expected to spend much of that raising above £42,000 the income of a parent before their household loses child benefit.

Mr Clegg said that the priority of the Budget was to provide “real help to people on middle and low incomes” struggling with higher prices and the “economic implosion” left by Labour. He added that even after a cut in the top rate of tax, the Government believed that “the wealthy should pay more because the broadest shoulders should bear the heaviest burden”.

Despite the 50p tax rate, the number of bankers seeking exodus in Switzerland slowed last year, figures showed last night. The Swiss Federal Migration Agency said that 320 British bankers moved there in 2011, down from 383 in 2010, according to Channel 4 News.

Mr Dale, speaking after the main inflation measure fell to 3.4 per cent last month from 3.6 per cent in January, said that the Government could not count on it continuing to fall.

It was “just as likely” to be above 2 per cent in the medium term as below the target figure.

He also said that interest rate cuts and money printing by the Bank were discouraging people from saving and were holding back the rebalancing of the economy.

Mr Dale, speaking in Wales, cast doubt over the shift from services to manufacturing, a central plank of the Chancellor’s policies, saying that the distinction between the two sectors was becoming increasingly blurred.