Thirty-five years ago, Denis Healey made good on his pledge to “squeeze the rich”, and put up the top rate of income tax to 83 per cent. Rather than get squeezed, many of the rich simply moved to countries with lower taxes and better climates.

Yesterday, Alistair Darling put the top rate of tax up to 50 per cent. Many predict the same result as in 1974. Tax advisers say that the change moves Britain to near the top of the world league for tax on the rich and warn that the rise will cause serious damage to the economy.

Yet the move will not raise a huge sum for the Exchequer. For cynics it looks suspiciously like a ploy to distract attention from the scale of the crisis in Britain's public finances revealed by the Chancellor yesterday. David Cameron, the Conservative leader, described the changes as clever political taxes on the rich.

The symbolism was dramatic. After more than a decade in which Labour has embraced entrepreneurs and encouraged the rich to come to Britain, it is now breaking a manifesto pledge not to increase the top rate of tax in this Parliament.

Budget 2009: A step-by-step guide

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BACKGROUND

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Ten years ago, Peter Mandelson declared that new Labour was “intensely relaxed about people getting filthy rich, as long as they pay their taxes”. But a top rate of 50per cent, the withdrawal of personal allowances, and cuts in tax relief on pension contributions for those on £150,000 a year, was probably not what he had in mind.

The truth is that a decade ago increasing the top rate of tax would not have been popular. Now, particularly given the role of highly paid bankers in fuelling the credit crisis, voters are happy to see the rich squeezed. It was notable that the CBI did not immediately condemn the moves yesterday.

Nevertheless, many business leaders believe that the Government is taking a big risk. Hugh Osmond, the pubs and pizza entrepreneur, said yesterday it was very likely that he would move his Sun Capital investment vehicle offshore, probably to Switzerland, as a result of Labour's tax changes: “I don't feel happy about being driven out of the country that I love, but there comes a point when thousands of pounds a week becomes compelling.”

Luke Johnson, the entrepreneur and chairman of Channel 4, said that the changes sent an awful signal to wealth creators: “The world is dramatically more mobile than it used to be and dramatically more international. The possibility of people deserting Britain because tax rates are lower elsewhere is a real risk.”

It is not just the City that could suffer. People in the entertainment industry warned that it could trigger the sort of exodus of talent seen in the 1970s. After Mr Healey raised the top rate of tax to 83 per cent in his first Budget as Chancellor it was still as high as 60 per cent in 1988, when Nigel Lawson cut it to 40 per cent.

Many other countries have been reducing their top rates recently, and the accountancy firm Ernst & Young said that yesterday's rise will move Britain from nineteenth to seventh in the league of highest marginal rates. It is not just those earning more than £150,000 who will face high rates. Because of the removal of personal allowances, those earning £100,000 will pay 60p in tax for every extra pound that they make.

There are serious doubts about how much the tax increases for the rich would raise in practice.

The Institute for Fiscal Studies recently calculated that the increase to 45 per cent proposed in November, which the Treasury claimed would yield £1.8 billion year, could actually end up costing the Exchequer money because people would emigrate or find ways round the new rate.

Even if the Treasury is right and the changes yield £7 billion in 2012-13, they will plug only a very small part of the gaping hole in the public finances revealed yesterday.

Mr Darling said that public borrowing would reach a postwar high of £175 billion this year, or 12.4per cent of output, falling only marginally to £173 billion next year and £140 billion the year after.

Even that reduction depends largely on Mr Darling's forecast that the economy will bounce back swiftly from the recession and then grow at a healthy rate. He predicted that output would contract by 3.5 per cent this year but grow by 1.5 per cent next year. This is dramatically more optimistic than most independent forecasters, not least the International Monetary Fund, which predicted yesterday that the economy would contract by 4.1 per cent this year and by another 0.4 per cent next.

Looking farther out, the Chancellor said that the trend growth rate would return to 2.75 per cent. These predictions were widely derided by economists, who suggested that they were the result of wishful thinking rather than serious analysis.

In particular, the long-run growth prediction assumes that the economy resumes its former shape, including high levels of borrowing and immigration, which is seen as highly unlikely.

It is hard not to conclude that the highly optimistic assumptions were the only way that Mr Darling could bring the budget back into balance, without massive, and highly unpopular, tax increases or spending cuts. Mr Darling did cut the rate of growth in public spending in the medium term from 1.1 per cent to 0.7per cent. But many observers see that as neither credible nor sufficient.

The admission that the Government would have to sell £220billion of gilts to pay the bills this year spooked the markets, with UK government bond prices falling sharply. But traders said that the reaction was as much to do with the lack of confidence in Mr Darling's medium-term forecasts as the £40billion rise in expected issuance this year.

As the CBI said, the key question for the Budget was whether it set out a credible and rigorous path for restoring the public finance to health: “The preliminary judgment must be that it does not.”

Even on Mr Darling's optimistic assumptions, taxpayers will have to wait eight years to see the government budget back in balance. If, of course, they haven't moved to Switzerland.

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