Brown's radical Budget

Gordon Brown will signal a long-term overhaul of the tax and benefit systems in next Wednesday's Budget. He will also announce radical plans to reshape the entire Budget process.

Beyond the central measures of his welfare-to-work scheme for the young and long-term unemployed, financed by the windfall tax, the Chancellor will outline his intention to improve work incentives and reduce the burden of taxation on the low-paid.

The Budget will also emphasise the use of the tax system to cut back on pollution and encourage energy-saving. The Chancellor and John Prescott, Deputy Prime Minister, yesterday met in private to discuss the inclusion of "green taxes" which will form a key part of the Budget.

They discussed a hike in the duty on petrol and diesel, and it is believed there will be increases in other environmental taxes, such as the landfill tax, while VAT on loft insulation is expected to be cut in line with the reduction in VAT on domestic fuel from 8 per cent to 5 per cent.

Senior ministers believe that Britain, like California, will not object to taxes that are seen as environmentally friendly, making Mr Prescott's superministry, in charge of the environment, transport and the regions, a vehicle for new tax revenues.

Tony Blair staked out the Government's commitment to reducing greenhouse gases in his speech to the United Nations on Monday, in a clear signal that more green taxes are on the way. The long-term options being considered include road tolls, road pricing, and replacing the road fund licence with higher petrol duties.

The Chancellor is expected to confirm the Government's manifesto pledge to introduce a 10p starting rate of income tax.

Mr Brown will indicate plans to shift away from expensive tax reliefs and allowances that disproportionately help the well-off.

The most vulnerable of these are mortgage interest tax relief and the married couples' allowance, which between them cost pounds 5.5bn a year. Tax relief on pension contributions, which channels about pounds 6bn a year to top rate taxpayers, is a longer-term candidate for reform. The most likely alternative would be to introduce a flat-rate tax credit on pension contributions.

This ties in with the approach being taken by the welfare-to-work task force, headed by Martin Taylor, chief executive of Barclays. The Chancellor favours boosting low incomes through tax credits in order to get around the way the loss of benefits reduces the incentive to work.

Welfare-to-work will be the core theme of the Budget, and Mr Brown will give details of the training and education schemes to be offered to 18- to 25-year-olds with the money raised from the windfall tax on the privatised utilities. The Chancellor is expected to confirm the scrapping of universal child benefit for 16- to 18-year-olds, in return for means tested educational allowances.

With an emphasis on creating jobs and boosting investment in the long term in his Budget speech, Mr Brown is expected to encourage companies to retain profits for investment rather than paying them as dividends by ending the dividend tax credit claimed by pension funds. The move will harm profits in the short term, but the proceeds could be channelled back to companies.

The Chancellor will set out a new approach to future Budgets. He will draw a parallel between the transparency he has introduced to the setting of interest rates, by making the Bank of England independent and accountable, and the need for the same kind of openness about taxes and spending.

In his speech on Wednesday he will also set out the Government's intention to run a macroeconomic policy that delivers stable growth and low inflation, setting this in the context of the need to remain competitive in a global market.

The recent assessment of the Treasury's economic assumptions by the National Audit Office made it plain that Mr Brown has taken a cautious approach to public finances. Actual government borrowing this year and next could well be lower than the Budget "Red Book" will indicate because the economic boom will boost tax revenues.

Don Macintyre, page 19