Gordon Brown delivered a barnstorming Budget for business and the middle classes today, with a 2p cut in the basic rate of income tax, a 2p cut in corporation tax, and new tax breaks for investment and research and development.

In a Budget full of surprises that took the political fight to the Conservatives as Mr Brown prepares for a move to Number 10, the Chancellor pledged to cut the basic rate of income tax from 22p to 20p.

But the Conservatives said his measures amounted to a “tax con”. The corporation tax cut will be offset by an overhaul of the allowances system, the Budget revealed, while Mr Brown also did away with the 10p starter rate of income tax.

Plans to align the National Insurance system with income tax thresholds will raise the contribution rate for a swathe of those on above-average incomes.

The Chancellor kept his upbeat forecasts for economic growth and inflation unchanged. But he confirmed a tough squeeze on future Government spending, which will grow by 2 per cent a year in real terms over the coming three years, slower than the growth rate of the economy.

The squeeze means that spending growth from 2008 to 2010, ahead of the next election, will halve from the pace seen since the turn of the decade. This will face the Chancellor with tough political battles.

Mr Brown also revealed plans to increase public borrowing by £10 billion more over the next four years than he announced three months ago.

The FTSE rose to a three-week high as Mr Brown said that the standard rate of corporation tax would be slashed to 28 per cent from 30 per cent from April 2008, in an attempt to boost competitiveness.

Capital allowances would be simplified to just two categories, in part by phasing out a “poorly-targeted” relief aimed at industrial buildings. The main R&D tax credit and environmental capital allowances would be expanded, he said. In addition, every business would be entitled to a £50,000 investment allowance from April 2008.

The Chancellor's new spending plans mean that total government spending will now rise by 2 per cent a year from 2008-09 to 2010-11.

That represents a sharp drop in spending growth from the average of 4 per cent per year seen since the turn of the decade, confronting Mr Brown with tough choices in the coming spending round if, as expected, he succeeds Tony Blair as Prime Minister this summer.

He also announced that he will sharply increase planned Government borrowing over the coming four financial years by a total of £10 billion.

Borrowing in 2007-08 will rise by £3 billion to £34 billion, compared with the forecasts set out in the Pre-Budget report in December. In the following years borrowing will be £3 billion, £2 billion and £2 billion more than previously intended in successive years,

He said he would generate £36 billion from an expanded programme of asset sales, which he widened to include a new sale of radio spectrum and a £6 billion privatisation of student debt.

He confirmed his forecast of GDP growth of between 2.5 and 3 per cent in both 2008 and 2009.

“My report to the country is of rising employment and rising investment, continuing low inflation, and low interest and mortgage rates,” he said.

The Chancellor said his Budget set out the long-term reforms the economy needed. “This is a Budget to expand prosperity and fairness for Britain’s families,” he said.

Earlier this week the Conservatives pledged to cut the headline rate of corporation tax to 27 per cent.

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