Mortgage tax rise on the way

Middle-class home-owners who voted Labour into office were warned last night to be ready for a tax hike of up to pounds 3bn in the Chancellor's radical, wide-ranging Budget on Wednesday.

Gordon Brown is expected to hit the middle classes by reducing mortgage interest tax relief (Miras), raising the ceiling on national insurance, and imposing a range of "green taxes". Treasury sources yesterday dismissed as "speculation" the threat to abolish Miras to save a total pounds 2.4bn, but some of Mr Brown's most senior ministers last night said they believe he will go ahead by cutting the level of the tax relief, which is worth pounds 30 a month to those on average earnings, to damp down the inflationary rise in the housing market.

Taxes on car ownership will also rise, with steep increases in duty on petrol to penalise "gas guzzlers" as part of the green strategy by John Prescott, the Deputy Prime Minister. The public health drive by Frank Dobson, the Health Secretary, will also see the duty on cigarettes increased.

"Most people would not weep if green issues were pushed forward in the agenda, and people were realistic about Miras being an anachronism," said one senior minister. "Gordon will have to raise more than would otherwise be necessary just to take account of the gap in public expenditure totals."

Peter Lilley, the Shadow chancellor, warned that Labour's spin doctors were "preparing the ground for a middle-class tax hike". Denying the Tories had left a "black hole" in the accounts, Mr Lilley said economic growth should be slowed by interest rate increases, not tax rises.

Tax loopholes are one of Labour's key targets, and Mr Brown is expected to stop employers avoiding paying national insurance by giving their staff shopping vouchers. Around pounds 40 million was paid in vouchers to about 160,000 employees, according to the Treasury. Mr Brown will insist that his package is a budget for the "long term" and Cabinet colleagues last night were promising that the pain would be balanced by good causes.

The public utilities, including the British Airports Authority and British Telecom, will be told to pay around pounds 5bn in the windfall profits tax to fund the "welfare to work" plans for getting 250,000 young people off the dole.

The Education and Employment Secretary, David Blunkett, will announce details of the programme costing pounds 750m over four years to meet the election pledge to provide training or education places for all those on Job Seeker's Allowance for six months or more.

Mr Brown will also signal the move towards a unified tax and benefits system, with the target of a 10p lower rate of tax. The Chancellor will announce that his next Budget will be in March; the usual Autumn spending statement will also move to the spring.

The uprating of benefits will go ahead automatically this November, in line with inflation, but the Chancellor is planning to announce the results of the fundamental review of spending with his next budget. One advantage, supported by Ann Taylor, the Leader of the Commons, is by moving the tax and spending package to the Spring, that it will avoid a clash next autumn with the Queen's Speech.