HOWZAT

The proposal will cost him £1.4 billion, compared with £3.5 billion for the Tory plan. Mr Darling will finance the inheritance tax cut and spending by raising an extra £950 million from capital gains tax in a way that produces more losers than winners, £500 million from airline duty and £500 million from the charge on nondomiciles. The rest will come from higher borrowing and hopes of higher growth.

The Conservatives called the inheritance tax change a con because couples could - with the help of their lawyers or accountants - already make use of both their £350,000 allowances. Tory sources said that 500,000 couples employed such techniques and would not be helped by the Labour plan.

The Tories also said the plan to fix capital gains tax at one rate of 18 per cent would hit small companies and entrepreneurs, as well as the stated target of private equity firms. The change will, however, benefit buy-to-let property owners and individuals who invest in the stock market. Higher-rate taxpayers pay 40 per cent capital gains tax if they sell such investments after less than three years - or 24 per cent after ten years - but from next year they will pay the new flat rate.

In his first and highly political economic report Mr Darling attacked the Conservative proposal to pay for their inheritance tax cut with a flat-rate £25,000 charge on wealthy, “nondomiciled” foreigners living in the UK who do not pay British taxes. He said that the levy would raise just £650 million - far short of the £3.5 billion the Tories claimed.

However, he faced opposition jeers when he announced plans to impose his own charges on “non-doms” who have been in Britain for seven years - with a higher rate for those who had been the country for ten years.

There was further mocking when he announced that he was adopting one of the Conservatives’ key “green” proposals: switching aviation duty from passengers to flights from 2009.

Mr Darling said that his own more modest - and more complex - proposals on inheritance tax raised the threshold above the value of 97 per cent of homes while giving him scope to increase investment in public services.

As expected, Mr Darling downgraded Mr Brown’s forecast for economic growth next year. The economy is now expected to grow by between 2 and 2.5 per cent - compared with Mr Brown’s prediction of 2.5 to 3 per cent.

But the Chancellor forecast that it would bounce back strongly in 2009 – the likely year of the next general election - with growth of 2.5 to 3 per cent. Government borrowing this year will hit £38 billion, £4 billion more than Mr Brown was predicting in his last Budget in March. Overall, spending by government departments is now set to rise from £345 billion to £397 billion over a three-year period - an average of about 2 per cent in real terms. That includes a doubling of investment in transport, which will rise to £14.5 billion a year, with funding for strategic road schemes such as widening the M1 and M25 as well as the London Crossrail project.

Mr Darling told the Today programme that the increase in government borrowing was due to the global credit crunch arising from the US sub-prime mortgage crisis.

“(Borrowing) does rise next year, and will rise next year, because, as I have made clear, what’s happened in America has gone right across the world,” he said.

He added that borrowing had, in any case, been lower in the last year than his predecessor anticipated, and would then go down again after this year’s increase.

Mr Darling said that the Government would be spending £2 billion more than previously planned on health and education. The health spending increase is 4 per cent a year in real terms over the period, compared with an average of 7 per cent per year since Labour came to power.

The extra funds for education, which includes £250 million for “personalised” learning, mean that spending on schools, colleges and universities an average rate of 3 per cent in real terms over the next three years, rather than the 2.4 per cent in the original March plans.

On security, Mr Darling announced the creation of a new single budget for counter-terrorism, covering the work of the police and the intelligence services. The Armed Forces will receive an additional £400 million to cover the cost of operations in Iraq and Afghanistan.

The announcements modestly reduced taxes this year and next, with small handouts of £385 million and £370 million, but then raised a net £1.2 billion in 2009 and £1.4 billion in 2010 - moves that will help the Chancellor to accumulate an election war chest.

Vince Cable, the Liberal Democrat Treasury spokesman, said that Mr Darling had been forced to deliver the tightest spending round in a decade after ten years of economic neglect by Mr Brown. “For too long the Prime Minister callously disregarded the mounting problem of personal debt, fuelled by irresponsible lending,” he said. “With a crushing spending squeeze on local government, it seems inevitable that council tax will rise by as much as 5 per cent each year. This will mean that council tax will have more than doubled since Labour came to power.”

Times Recommends

• Lies and cover-up at MG Rover exposed by report
• High oil prices push manufacturing costs up
• Primark founder steps down as chief executive