'Spending cuts will be tough but fair'

A bitter political row over the need for massive spending cuts and tax rises escalated yesterday ahead of what is expected to be the harshest Budget for decades.

Chancellor George Osborne insisted he had to accelerate austerity measures to tackle the UK's record deficit - or put the country on "the road to ruin".

He signalled that welfare payments would be targeted in tomorrow's "emergency" package which would spell pain for everyone but would be "tough...but fair".

Public sector pay will also be squeezed as part of what Mr Osborne said would be a blueprint for the whole Parliament - not just the next year.

But Labour accused the government of pursuing an ideological agenda against the public sector and said moving too fast would "crush" the fragile economic recovery.

In a television interview just two days before he unveils the crunch measures to MPs, Mr Osborne refused to be drawn on any details of his proposals.

They were agreed on Friday in a meeting with Prime Minister David Cameron and Lib Dem coalition partners Nick Clegg, the Deputy PM, and Chief Treasury Secretary Danny Alexander.

During the General Election the Lib Dems argued against faster cuts - making the Budget into the first serious test of the strength of the coalition deal in Parliament.

Mr Osborne would not be drawn on whether he may freeze public sector pay for those earning over £18,000 for more than a year - but urged unions to accept restraint was vital to protect jobs.

And he announced that Labour ex-Cabinet minister John Hutton would head a review of public sector pensions in a bid to dampen claims the Tories had an agenda against public sector workers.

The "out of control" benefits Bill would also be tackled, he said - with middle-class benefits such as child tax credit expected to face the axe.

Mr Osborne confirmed that he would announce a bank tax to protect the taxpayer against future collapses and raise the rate of capital gains tax to prevent "massive" income tax avoidance.

He said he had listened to concerns, much from Tory MPs, over the effect of that policy on second homes, share options and other assets saved by less well off people for their retirement.

There was speculation VAT could rise but not as far as the 20 per cent previously predicted.

One measure that was confirmed - by Business Minister David Willetts - was a tax break for new firms setting up in areas likely to be worst hit by public sector cuts.

Those outside London, the South East and the East regions will be exempted from paying National Insurance contributions on the first 10 employees they take on.

The measure is expected to cost around £900 million and be worth up to £50,000 for each business or £5,000 per employee.

Mr Osborne told BBC1's Andrew Marr Show: "We have inherited a truly awful financial situation...and unless we take the determined and concerted action to deal with that then I am afraid we will find our country on the road to ruin.

"We will find higher interest rates, businesses going bust, unemployment rising and our living standards declining. I am not prepared to put up with that."