Higher tax rate seen as the last nail in the coffin of Blairism

Gordon Brown has staked Labour's election chances on a recovery next year with a £20 billion 'spend now, pay later' package that threatens to alienate the Middle England voters who gave Tony Blair three election victories.

The City reacted positively to the carefully leaked plans to cut VAT from 17.5 per cent to 15 per cent for 13 months and the FTSE index rose nearly 10 per cent - a record for one day. But there was a bad after-taste to this afternoon's package.

For a start, it failed to convince Labour's left wing. Alan Simpson, a key member of the Campaign Group of Labour MPs, said it was too little. "It will get us through this winter, but it won't get us through the recession," he said. "We cannot shop our way out of recession."

The tax hike that will hit Middle England will also upset the Blairites. The introduction of a new upper rate of 45p in the pound for those earning over £150,000 was seen by Labour MPs tonight as the last nail in the coffin for 'Blairism'.

Alistair Darling, the Chancellor, got a desk-banging reception at the Parliamentary Labour Party after delivering his report to the Commons but fewer will be cheering the morning after when the full impact of the tax increases to pay for the pre-Christmas sweeteners sinks in.

The duty on cigarettes, fuel and alcohol will rise to pay for the £12.5bn cost of cutting VAT and the Treasury revealed these increases will remain after VAT goes up again at the beginning of 2010, leaving smokers and drinkers paying 2.5 per cent more in the long term.

Vince Cable, the Lib Dems' economics spokesman, rated by many as the most accurate forecaster in this recession, poured cold water on Brown's hopes that the cuts in VAT will lead to a bonanza on the high street. He said the money spent on VAT cuts should have been spent to pay for cuts in tax on low-paid workers.

The Chancellor has cut his wildly optimistic growth forecast of 2.75 per cent next year to around minus one per cent but is gambling on growth responding quickly to the fiscal stimulus after that. He is claiming the books will return to balance by 2015. But he has proved over-optimistic before.

The key factor in his plans is that no one will know for sure who is right until after the 2010 general election and let's not forget that, despite his denials, Gordon Brown is still keeping his options open on going to the country next year.

THE MOLE: PRE-BUDGET REPORT

FIRST POSTED NOVEMBER 24, 2008