The Budget: Lamont delays the pain with three-year gamble: - VAT imposed on fuel bills as Chancellor starts to curb public borrowing and reassure financial markets

NORMAN LAMONT yesterday gambled on a recovery this year by deferring most of his tax increases - worth pounds 10.3bn in 1995-96 - despite a surge in government borrowing to pounds 50bn.

The most dramatic of the Chancellor's tax increases was the imposition of Value-Added Tax on household fuel and power bills. It will be levied at 8 per cent from April next year and climb to the standard 17.5 per cent rate in 1995- 96 - eventually raising pounds 2.3bn in a full year.

The tax hikes include an increase in employees' National Insurance contributions from 9 per cent to 10 per cent. This is equivalent to a penny in the pound on income tax except that no tax is paid above a ceiling of pounds 420 a week.

By extending the range of VAT, Mr Lamont broke at least one of John Major's election pledges in a high-risk Budget statement that unusually set the tax and borrowing framework for the next three financial years - the run-up to the next election.

That VAT decision prompted John Smith, the Labour leader, to deliver a scathing attack on Mr Major and his Government for ruthless, deceitful and cynical betrayal of their election promises: 'These people make pledges as if they matter not a whit.'

A special analysis of the Budget - the last one to be held in the spring - prepared for the Independent using the Cambridge computer model of the tax and benefit system suggests that the best-off tenth of the population would have incomes cut by 1.5 per cent when the measures are fully implemented, compared to a 3 per cent cut for the poorest tenth.

The Chancellor's 111-minute speech, uninterrupted by the customary Tory backbench cheers, left his colleagues divided. Some said he would convince the markets and win the prize of economic recovery, while others felt that the overall effect would not stimulate the economy in the short-term and would damage the Conservative Party in the long-term.

A senior Treasury source said that the Chancellor's aim in the Budget was to foster an economic recovery now, while delaying tax increases to reduce the burgeoning public sector borrowing requirement, expected next year to reach its highest level since 1975- 76.

The political advantage for the Prime Minister is that if Mr Lamont's gamble does not succeed, he has enough time to replace him as Chancellor - and order a change of course - well before the election, expected in June 1995 at the earliest.

Mr Lamont promised a modest net increase of about pounds 490m in taxes from next month, mainly through freezing the value of personal income tax allowances and raising vehicle excise duty. The serious tax increases are to begin in 1994-95, when the Chancellor is set to raise pounds 6,725m more revenue than he would do if he merely raised taxes and allowances in line with inflation. This is equivalent to 4p in the pound on basic rate income tax.

In the financial year 1995-96, Mr Lamont's tax increases are equivalent to an extra 7p on the basic rate in what could well be election year. Mr Lamont described those increases as 'a wedge of increasing revenue'.

The Chancellor attempted to reassure the financial markets that his tax increases would indeed take effect in future years by promising that they would be put into legislation this year.

In an upbeat economic forecast, Mr Lamont said that the economy would grow by 1.25 per cent this year, up from the 1 per cent that he forecast in November. Inflation is expected to be 3.75 per cent in the fourth quarter of the year.

But Mr Lamont disappointed the City when he signalled that further interest rate cuts are unlikely for the time being. Rates are thought to be low enough to secure recovery yet high enough to hold inflation down.

For the unemployed, Mr Lamont announced a pounds 230m package to help an extra 100,000 people without jobs and he increased the 20p tax band by pounds 500 to pounds 2,500 from next month, putting up the number of people who will pay tax at the 20p rate by about a fifth to 4.9m.

The increase in employees' NICs will ultimately produce pounds 2.1bn in a full year. Income tax allowances and the basic rate limit will be frozen next year, raising pounds 660m in 1993-94 and pounds 920m in 1994-95.

Alan Beith, for the Liberal Democrats, said the increase in National Insurance contributions was like a rise in income tax, except that those on the highest incomes escaped.

In another revenue-raising move, Mr Lamont announced that tax relief on mortgage interest payments would only be allowed against the 20 per cent reduced income tax rate rather than the 25 per cent basic rate from April 1994. Allowances for married couples will be similarly restricted from April 1994, ending relief at the top and basic rates of 40 and 25 per cent. This will raise pounds 910m in 1994-5.

The Chancellor's main concession on the tax front was a modest extension of the reduced 20 per cent income tax band from April. He presented this as a further step towards his objective of a 20p in the pound basic rate of tax. From next month, the reduced rate band will be widened by pounds 500 to the first pounds 2,500 of taxable income. From April 1994 it will be expanded to the first pounds 3,000 of taxable income.

The aim of the programme of tax increases is to halve the Public Sector Borrowing Requirement in four years from the 8 per cent of national output projected for financial 1993-4.

'All around the world we see countries striving to reduce their fiscal deficits or suffering from their failure to do so sooner,' the Chancellor told the Commons.

Praising President Bill Clinton's recent deficit reduction plans, he invoked the example of Italy as a 'salutary warning to those who think that a problem postponed is a problem solved.'.

Mr Lamont said no further extension of VAT - to newspapers, food, children's clothing and transport - was contemplated.

When the question of broken promises was raised with the Chancellor by two Conservative MPs at a private meeting of the backbench finance committee, Mr Lamont told them the pledge not to extend VAT to domestic heating and lighting had been given before the Government had given other pledges on global warming at the UN Convention on Climate Change at Rio last June.

John Townend, the committee chairman, said after the meeting that the VAT pledge had been given in the conditions prevailing at the time of the election, and he added: 'When you've got a budget deficit the size we have, you've got to take painful action.'

But there was plenty of scope for Opposition exploitation of Conservative difficulty last night, including the Budget plans to restrict the scope of mortgage interest tax relief, and the married couples' allowance, to 20p in the pound - something that had been mooted, and rejected, by Labour before the last election.

The Budget measures are expected to increase underlying prices - excluding mortgage interest payments - by 0.25 per cent this year, and by 0.5 per cent by the middle of 1994.

The fall in the pound since Black Wednesday has made the Treasury more pessimistic about Britain's trade gap, because the price of imports rises. It expects a pounds 17.5bn current account deficit this year, compared to the pounds 15.5bn Autumn Statement forecast. The current account deficit is expected to widen further early next year.

Mr Lamont also announced a pounds 1bn package for business, prompting Labour to issue a reminder that when they had proposed a pounds 1bn recovery package a year ago, before the election, Mr Major had said it would 'make no impact whatsoever, it's a sticking plaster. . .'

The package includes an improvement to the Government's loan guarantee scheme following criticism that the banks have been relucant to lend to small businesses. The Chancellor also eased VAT collection requirements.

For business generally, he extended insurance cover and cut premiums for capital goods exporters to boost the export drive.

But Donald Dewar, Labour's social security spokesman, said that the freeze on personal allowances that had also been announced by Mr Lamont would take an extra 200,000 low-income earners into tax for the first time.

There was also a perceived sop to the by-election voters of Newbury with an announcement that racehorse owners are to be allowed to register for VAT.

(Photograph omitted)