Tearing up the Blair tax promise is a big political gamble for Brown

Gordon Brown has trailed more of today's Pre-Budget Report than any previous Budget but the disclosure last night that he is planning to pay for tax cuts and a spending splurge with a new upper rate of tax of 45p in the pound staggered his opponents and his own supporters alike.

The additional 5p tax will be imposed on the highest earners - those on more than £150,000 a year - and will raise only a few billion pounds a year, but it is the symbolism of the move that comes as a shock to Westminster.

Tony Blair put his signature to a promise at the 1997 General Election that brought Labour to power not to raise income taxes; today, with breathtaking audacity, Brown is preparing to tear up that promise. As a result, Tory leader David Cameron will be able to say with some justification that Brown is returning to his political roots, while on the Labour benches, the potential fall-out is well illustrated by the immediate welcome for a new higher rate of tax from the left-wing MP John McDonnell, who issued a statement saying it was "long overdue".

In effect, this means senior Blairite figures like David Miliband and Lord (Peter) Mandelson now find themselves lining up with a staunch socialist. Mandelson will have to grin and bear it - he owes Brown for his peerage and this is the price he has to pay. But those Blairites who wanted Miliband to challenge Brown for the leadership will be back on the offensive the moment the Brown-Darling package shows signs of failing, if not before.

They have always taken the line that Labour's promise not to 'squeeze the rich until the pips squeak' was the key to New Labour's success at winning over Tory voters. They, too, will interpret the new tax band as Brown reverting to his true political beliefs.

As the Mole was the first to report, VAT is likely to be cut today from 17.5 per cent to 15 per cent following pressure from backbench MPs. There will also be extra protection for the thousands on low incomes who lost out from the abolition of the 10p tax band. The compensation - worth £2.7bn - will be continued for another year. Also, the banks will be warned to begin lending again.

Though the headlines will be grabbed by the tax rises, the soaring plans for public spending will make equally astonishing reading. The Mole has heard that the Treasury has asked ministers to come forward with major projects that could increase jobs and boost the economy.

Geoff Hoon, the Transport Minister, is the main gainer - the Treasury is ready to approve major rail and road schemes. Margaret Beckett, the Housing Minister, is also likely to be given the money to launch a massive building programme for affordable housing, and Labour MPs are hoping they will include council housing for rent.

But the City will be looking at the bottom line - how much extra is Brown going to borrow? Conservative estimates suggest it could be £70bn, but there are expectations that it could rise to £100bn and most of that will have to be raised in future years by higher taxes.

THE MOLE: PRE-BUDGET REPORT

FIRST POSTED NOVEMBER 24, 2008