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Alistair Darling set the battlelines for the next election and prompted warnings of a 1970s-style brain drain today when he slapped a new 50p tax rate on high earners.

Mr Darling announced the tax increase in his second Budget as Chancellor after admitting that net public sector borrowing would hit a massive £175 billion this year, and total national debt would peak at almost 80 per cent of GDP.

Altogether the Treasury is forecasting borrowing of more than £700 billion over the next five years - and that figure could rise if Mr Darling is wrong in his prediction that the UK will emerge from recession by the end of this year and return to growth thereafter.

Budget 2009: A step-by-step guide

Alistair Darling has revealed the steps he believes will drag Britain out of the worst economic slump since 1946

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BACKGROUND

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• Wealthy pension investors hit

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• Budget 2009: speech in full

Related Links

• Budget 2009: A step-by-step guide

• Budget 2009: speech in full

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Multimedia

• GRAPHIC: 2009 tax tables

• In full: the Budget Page

The Chancellor said that those earning more than £150,000 a year would be taxed at 50p in the pound from next April, up from 40p. Those earning more than £100,000 a year will lose all personal allowances, significantly increasing the tax bills of thousands of professionals, including doctors and head teachers.

The top rate of tax has been at 40p since Nigel Lawson cut it from 60p in 1988 but Mr Darling had already announced a rise to 45p from 2011. The decision to bring the increase forward breaks a key pledge in Tony Blair's 2005 manifesto not to raise either the basic or top rate of income tax during this Parliament, and represents a clear break with New Labour's emphasis on rewarding enterprise.

It brought immediate warnings from the City that highly-paid individuals would move to countries with more progressive tax regimes, as happened under Labour in the 1970s when the top rate of tax hit 83 per cent.

But the Budget's most eye-catching measure clearly has a political aim: to wrongfoot the Tories ahead of a general election due by May 2010 at the latest.

Alex Henderson, tax partner at PricewaterhouseCoopers, said today's tax hike could see the City's high-earners flee to lower tax locations such as Ireland and Switzerland. He said that a reduction in tax relief on pension contributions for those earning over £150,000 would hit the self-employed and small businesses especially hard.

"Unfortunately, the Chancellor seems to have ignored the knowledge economy entirely," Mr Henderson told The Times.

"This has got to reduce the UK's attractiveness as a place to do the kind of business that requires highly-skilled and correspondingly highly-paid individuals, whether that is people choosing to go overseas or - the hidden cost - people who never come here at all."

Mr Darling told the Commons that the UK economy would contract by 3.5 per cent this year, making the current recession the worst since the Second World War. But he said that he expected economic growth to resume by the end of this year and to see growth next year of 1.25 per cent - more bullish than current market forecasts - lifted by the dynamism of the UK economy and burgeoning demand for high-tech exports.

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