Darling sets the dividing line

CHANCELLOR Alistair Darling gave a prelude to the election battleground in his Pre-Budget report to the Commons today.

Mr Darling backed up Prime Minister Gordon Brown's attacks on the Tories' inheritance tax plans by freezing the threshold at £325,000. He stated that raising it was simply not a priority at present.

In one of the more surprising moves of the day, Mr Darling announced an increase to National Insurance Contributions by 0.5% but this will not apply to those on salaries of £20,000 or less.

The policy does not come into effect for anyone until April 2011, however.

A much more regressive tax increase was the restoration of VAT to 17.5% from January 1 though at least it was not put up to 20% as feared in some quarters.

In an undoubtedly popular move with the electorate, Mr Darling announced the widely expected windfall tax of 50% on bankers' bonuses of more than £25,000.

To prevent the government from having to chase up hundreds of individuals, the tax will be charged to the company but it currently only lasts until April.

Nevertheless, this is still a further hit to high earners after last April's announcement that an income tax band of 50% will be applied from 2010-11 on salaries over £100,000.

Other attempts at winning over the electorate include a postponement of the 1p increase in corporation tax to help small businesses and a 2.5% increase in the state pension.

Liberal Democrats treasury spokesman Vince Cable said the budget was "good for bingo and boilers" after a seemingly random cut in bingo duty from 22% to 20% and the introduction of a boiler scrappage scheme.

But Mr Cable also joked that Mr Darling must have forgotten to print several pages of his report as no specific spending figures were given for any department.

Mr Darling vowed to maintain spending on frontline public services such as schools, hospitals and the police but seems to be hiding the true scale of the pain until after a general election.

The chancellor was unable to cover up Britain's black hole, however. He admitted that the economy had shrunk by 4.75% in the last year, a worse result than expected.

He was also forced to concede that government borrowing in the past year was an eye-watering £178bn, £3bn more than expected.

It was announced that borrowing in the next year will also be £3bn more than forecast in April's budget, further increasing Britain's massive deficit.

Unsurprisingly, the deficit will form the basis for the Tories' attacks in the run-up to the election.

Shadow chancellor George Osborne described the state of the economy as "a catastrophe", arguing that spending needs to be cut immediately. Mr Darling defended Labour's spending plans.

Welcome to the great debate that will form the centrepiece of the coming election coverage.