Budget 1999: Brown hands out pounds 6bn to help children, elderly and low paid

GORDON BROWN announced a surprise cut in the basic rate of income tax yesterday in a pounds 6bn give-away Budget which switched money from high earners to low-paid families with children.

The Chancellor sought to head off Tory claims that he had imposed "stealth taxes" totalling pounds 40.7bn since the last general election by bringing in his long-promised 10p bottom rate of tax on the first pounds 1,500 of income from next month. But MPs were stunned when he added that the basic rate would also be cut, from 23p to 22p in the pound, from April next year.

To pay for the changes, mortgage tax relief and the married couples' tax allowance will be abolished next year. The allowance will be replaced by a new children's tax credit, but top rate taxpayers will receive less than those on the basic rate.

Labour MPs, who welcomed a further cash injection for health and education, said the Budget had the feel of "a pre-election Tory give-away". Downing Street denied it was a profligate package, insisting that Mr Brown was spending the dividend from bringing the economy under control.

Yesterday's radical reforms set the scene for a general election battle in 2001 in which the Tories will attack Labour's "backdoor tax rises".

But Mr Brown insisted that his package amounted to a boost for low- and middle-income families. The Treasury said 20 million households would be better off after the changes were phased in over the next three years. But this still left 4 million who would be worse off or whose position remained unchanged- mainly high-earners, single people or couples without children.

Mr Brown also announced an above-inflation increase in child benefit. It rises to pounds 14.40 for the first child next month and to pounds 15 in April next year. .

The winners also include pensioners, who will have a guaranteed minimum income of pounds 78 a week from April next year. Some 200,000 old people will be taken out of income tax, and the pensioners' winter fuel bonus will be increased from pounds 20 to pounds 100.

Mr Brown, who announced a long list of tax reliefs to boost small business, said his Budget was about "enterprise and fairness". Although an energy tax will be imposed on business, the Chancellor promised to compensate by cutting companies' national insurance payments.

The Chancellor is confident of winning the battle over "stealth taxes", believing that many high earners will still be better off after the loss of "middle-class perks" such as mortgage relief because theirdisposable income is rising. This is largely due to falling interest rates.

But William Hague branded Mr Brown the "pickpocket Chancellor". The Tory leader claimed he had been "aided and abetted" by "the artful dodger" - Tony Blair. The Opposition leader said an increase in national insurance would hit higher earners.

Mr Hague scorned the Chancellor's claim that the Budget was good for families. "It is good for families who don't have a mortgage, who aren't married, who don't run a car, who don't smoke, who don't save for a pension."

Mr Brown promised an extra pounds 430m to improve hospital accident and emergency units, and an increase of pounds 100m for technology in schools, plus pounds 60m for more books.

Treasury officials said the public finances would be pounds 10bn better off than previously expected over the next three years, due to lower government spending on social security and debt repayments. Mr Brown was using pounds 4bn of this to reduce borrowing, and injecting pounds 6bn into the economy.

It was a Budget with few losers. Smokers and drivers, as usual, pay higher duties.

The biggest gainers will be low-income families in work. Martin Barnes, director of the Child Poverty Action Group, said: "The Chancellor proved today that he supports the family and is genuine in his commitment to reducing child poverty."

The overall tax burden will fall from the next financial year. The tax cuts and extra spending announced yesterday are the fruits of tough Budgets in July 1997 and March 1998.

Yesterday's measures came as a relief to business after the big increases in their tax burden in Mr Brown's previous Budgets. Employers organisations welcomed the steps to boost small firms and encourage enterprise.

Alan Armitage, chief economist at the Engineering Employers Federation, gave a warm welcome to the announcements. "Many of the measures the Chancellor has announced will help sustain essential investment through the current downturn and help companies take advantage of future growth in the economy."

There was concern that Mr Brown's plans rely on his relatively upbeat outlook for growth. He defied City opinion by sticking to his forecast of growth of between 1 per cent and 1.5 per cent this year. Kate Barker at the Confederation of British Industry said: "He has stuck to optimistic economic forecasts, and he needs them to come true to be able to carry out his plans."

The Budget give-away was more than many City analysts had expected. Some warned that this would diminish the chance of another fall in interest rates.

Ian Peters, deputy director-general of the British Chambers of Commerce, while welcoming the measures, said: "The sting in the tail is that ... the Bank of England might have less room to reduce interest rates."

Despite these concerns, which led to a sharp fall in the gilts market, there wasagreement amongst experts that the public finances remain in very good shape.

Kevin Gardiner, an economist at Morgan Stanley, the investment bank, said: "The financial markets have over-reacted. Outside the markets this Budget should play tremendously well."

The Treasury's Budget 99 document showed that, adjusting for the economy's position in the business cycle, fiscal policy will continue to get tighter over the next three years. The pounds 6bn giveaway yesterday was actually needed to adjust for the fact that growth has slowed since last year.