Mandelson: Chancellor will deliver 'responsible and disciplined' budget

Chancellor Alistair Darling will deliver a "responsible and disciplined" Budget next week, ensuring Britain follows a stable course as it heads into recovery, Business Secretary Lord Mandelson said.

His comments last night came amid speculation that Mr Darling may use higher-than expected tax revenues to pay down the UK's record debt - currently 56% of GDP - by as much as £5-£10 billion.

The need to rein in spending looks set to rule out "giveaways" in next Wednesday's Budget, but figures released yesterday suggested Mr Darling may be able to downgrade his prediction of £178 billion public sector borrowing this year and make some inroads into the deficit.

Conservatives were today accusing Labour of being in "chaos" over tax, after Lord Mandelson suggested the Government might be ready to impose further hikes in 2011, on top of the new 50% income tax rate and the 1p National Insurance increase already announced.

The Business Secretary said that by the time of a spending review due to come into effect in 2011, the Government would be in a better position to judge "what the economic circumstances require, both in raising taxation - should that be necessary in addition to what we have already announced - or cutting public expenditure".

His comments followed hot on the heels of Chief Secretary to the Treasury Liam Byrne's retraction of a suggestion that Labour might be able to rule out a post-election rise in VAT.

Conservative Treasury spokesman Philip Hammond said: "Labour is in chaos on tax.

"First the Chief Secretary was forced to backtrack and admit that Labour would not rule out VAT increases.

"Now Peter Mandelson admits there may be tax rises in the second year of a new Labour government. People will be asking who speaks for the Government on tax - Liam Byrne, Peter Mandelson or Alistair Darling."

But in an interview with the Press Association, Lord Mandelson denied he had let slip secret plans for tax rises.

He made clear no Chancellor would "bind his hands" on future tax and spending decisions, but said these would be taken at the time in the light of prevailing circumstances.

But he added: "I made absolutely no suggestion or prediction that taxes would go up that year or any other year. That is a matter for the Chancellor of the Exchequer to judge at the time.

"We have made it absolutely clear that we are going to halve the borrowing deficit during the next four years and that will involve £19 billion worth of additional taxation. We have already made clear in the Pre-Budget Report what those tax increases will be, where they are fairly targeted and who will have to pay.

"Obviously no Chancellor is going to bind his hands, but these proposals are absolutely clear for anyone to understand and there is absolutely nothing that I said today that suggested or implied that we have other tax plans that we are going to bring out at a future time."

Looking ahead to next week's Budget, Lord Mandelson said: "I think what the Chancellor has said is right - we have to set a very stable course.

"Yes, recovery is under way, but the state of the economy is still quite fragile.

"We need to wait and see what the Chancellor has to say when the Budget comes, but he will be exercising the greatest responsibility and the greatest discipline because that is what the economy and the state of the public finance requires and demands."

Mr Darling will have more leeway than expected in the Budget thanks to the sums raised from the 50% supertax on banking bonuses over £25,000.

The Chancellor initially predicted the one-off levy would generate around £550 million for the Treasury, but banks' decision to carry on paying big bonuses means revenue from that source may have topped £2 billion.

The Financial Times today predicted that any additional sums could be used to pay down debt, rather than in a pre-election spending splurge to woo voters.

Figures from the Office of National Statistics showed state borrowing for the 11 months to February had reached £131.9 billion. While an all-time high, the figure gave hope that the Treasury may undershoot Mr Darling's £178 billion forecast for the year in December's Pre-Budget Report.

The ONS also revealed that tax receipts rose by 3.6% year-on-year to £42.6 billion as the recovery from recession gathered pace.

Receipts from VAT, which returned to 17.5% after a temporary cut to 15% to stimulate demand, rose 30% to £6.9 billion last month.