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Alistair Darling was embroiled in a row with the Tories today over opposition claims that his pre-budget report will penalise anyone earning more than £19,000 a year.
The chancellor denied the claim, saying that only those earning more than £40,000 a year will end up losing out when all the tax changes mentioned in yesterday's statement are taken into account.
But the Tories defended their figure, arguing that Darling could only make £40,000 the cut-off point by including changes to tax allowances that were already in place.
The row illustrates the importance attached to yesterday's statement, which politicians from all parties accept could have a decisive impact on the result of the next election.
The Tories said it was so important that there should be a full parliamentary debate on it. Although it incorporated much larger tax changes than a normal budget, it was technically only a pre-budget report, which is why more time has not been set aside to debate it in parliament.
In attacking the budget, the Tories have focused on the decision to raise national insurance contributions by an extra half a percentage point from 2011.
The government will also increase the allowance people receive before they start paying national insurance contributions. But, according to the Tories, anyone earning £19,000 will end up paying an extra £2 a year because the cost of their national insurance contributions will be worth more than their value of their allowance.
They also said anyone on £25,000 would end up paying an extra £32 a year, and anyone on £30,000 would pay £57 more.
In an interview on BBC Radio 4's Today programme, Darling said that the Tories were ignoring other allowances that would compensate for this increase.
"People earning less than £40,000 won't be paying any more," he said.
"I'm increasing the personal allowances with income tax … You have got to take all the tax system into account, not just one part of it."
But the Tories said that Darling was referring to increases in personal tax allowances announced shortly before the Crewe byelection earlier this year to compensate for the fact that millions were losing out through the abolition of the 10p tax rate.
At the time Darling said the allowances were being increased as a temporary measure, lasting for just one year. Yesterday he said that those increases would be made permanent.
But the Tories claimed that because those increased allowances were already in place, extending them into the future did not count as a genuine new announcement. Therefore, they said, Darling was wrong to include them when trying to calculate the net effect of his tax changes.
In his interview, Darling also denied that his decision to raise taxes for high earners meant the death of New Labour. He said that he still believed that Labour needed "the widest possible support" and that in the past all governments had redistributed money from the rich to the poor.
In a separate interview, George Osborne, the shadow chancellor, said that the best way to stimulate the economy was through "radical" cuts in interest rates.
"We have got to get lending going in this economy again, you have got to get credit to small businesses, that is where the action is needed, not, frankly, taking a huge risk with the public finances," he told Today.
He said that rate cuts should be accompanied by government measures to ensure that they were passed on by banks to business.
"I think you could directly insure - for a premium to protect the taxpayers' interest - lending from banks to businesses to get credit flowing, to keep people in work, to stop businesses folding," he said.
"These measures would do far more than a 2.5% cut in VAT - a temporary cut which would be paid for later with massive tax rises coming down the track."
- Pre-budget report 2008
- Alistair Darling
- George Osborne
- Economic policy
- Tax and spending
- Income tax
- Tax
- Recession
- Social exclusion
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