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Tax changes to help low earners and scrapping a fuel duty increase will make headlines, but the spectre of a double dip recession means the chancellor will still warn of austerity Hundreds of thousands more low-earners will be lifted out of income tax altogether and motorists will be offered relief from soaring petrol prices under plans to be announced by the chancellor, George Osborne, in the budget this week. The pledge to raise the threshold at which income tax becomes payable will form the centrepiece of measures aimed at relieving hard-pressed low-income groups – and boosting growth – as spending cuts bite. With unrest in the Middle East driving up international oil prices, the chancellor will cancel a planned increase in fuel duty, which was due to come in from 1 April and would have added up to 5p to the price of a litre of petrol. Reversing the rise will cost the Treasury almost £2bn, but Osborne is also known to be considering the more radical step of a fuel “stabiliser”, which would placate motorists and hauliers by cushioning the blow of rising oil prices. Osborne said last night he would use the budget to help jobless young people find work, funded by money from the government’s £2.5bn levy on banks. Official figures released earlier this week showed 974,000 young people out of work in the three months to January, the highest figure since records began in 1992. “Britain has to start making things again,” he wrote in the News of the World . “So this week’s budget will be unashamedly pro-enterprise and pro-jobs. In particular need of support are our young people. Youth unemployment started rising even before the recession but then reached record levels. That’s why I’ll be using some of the money our new government has raised from taxing the banks to create the most apprenticeships this country has ever seen, and a big expansion of work-experience places.” The decision to announce an increase in the personal allowance is outlined in an article for the Observer by the Liberal Democrat chief secretary to the treasury, Danny Alexander. He presents it as helping those most in need, at the same time as taking painful steps to slash the deficit. Alexander says that the budget will set out “further real-terms progress towards our goal of taking anyone earning less than £10,000 out of tax altogether”. It is understood that the tax-free threshold will be raised to around £8,000, with the change likely to come into effect in April 2012. In his emergency budget last June, Osborne responded to Lib Dem pressure to assist low earners by raising the personal tax allowance from £6,475 to £7,475, handing about £200 to all basic rate taxpayers, and removing 880,000 people from the tax net altogether. The plan for another increase in the threshold received qualified support. Gavin Kelly, chief executive of the Resolution Foundation, which represents low- to middle-income families, said it “would offer some welcome relief to many basic rate taxpayers, but would not offer much to the very lowest earners, who don’t pay tax, or middle-income families with children. For many working families, any gains from allowances are likely to be greatly outweighed by cuts to tax credits and the rise in VAT.” Matt Oakley, head of enterprise, growth and social policy at the centre-right thinktank Policy Exchange, said it would be unfortunate if help for low earners was paid for by widening the group paying top-rate tax. “Previous increases have been paid for by bringing more people into the 40% rate of income tax, which is not good for growth,” Oakley said. James Browne, senior research economist at the Institute for Fiscal Studies, said the measure was an inefficient way of helping the poorest households. “You’re giving a fixed cash amount to all basic rate taxpayers, so relatively little money is going to the people who you’re taking out of tax altogether,” he said, pointing out that more than 90% of the beneficiaries would be likely to earn more than £10,000 a year. “If you really wanted to target low-earners, perhaps you would be better off to increase the working tax credit.” While Osborne is keen to move the focus away from cuts, he will insist that he has no option but to press ahead with his austerity programme if the economy is to be restored to health. The 0.6% contraction in GDP in the final months of 2010 caused alarm at the Treasury and raised the spectre of a double-dip recession, for which Osborne would be likely to take the blame. On Wednesday, he will be forced to announce that the economy will grow more slowly than expected this year and next, prolonging the pain for households facing falling real incomes and rising taxes. Most economists expect the independent Office for Budget Responsibility to downgrade its forecasts for economic growth. Osborne was stung by accusations from outgoing CBI boss Richard Lambert that the government lacked a “growth strategy”. The chancellor will announce a plethora of reforms to fix what he has called Britain’s “debt-fuelled” economic model. Speaking at the Treasury last week, he said the budget would focus on skills, planning and green technology to resolve some of the long-standing problems in the economy. But in a speech to Labour’s Scottish conference, party leader Ed Miliband said the chancellor should instead take urgent action on the “cost of living crisis” facing people across the country, starting by cutting VAT on petrol. “In the interests of justice and prosperity, the government should pay for these measures not by cutting taxes for the banks but by imposing a tax on irresponsible bankers’ bonuses,” he said. “It’s time the people who caused this crisis pay their fair share in putting things right.” Friends of the Earth wants Osborne to deliver on the government’s promise to be the “greenest ever”. Executive director Andy Atkins said Osborne must make it cheaper and easier for people to reduce their reliance on oil, gas and coal.” Osborne will also promise a more detailed investigation into proposals to merge tax and national insurance. The idea was recommended in an Office for Tax Simplification report, commissioned by Osborne to come up with proposals to help small businesses. Breaking down the tax barriers and shattering the “contributory principle”, under which people qualify for certain benefits only when they have paid into the public coffers – could represent the most radical shakeup of the system since the foundation of the welfare state. Budget 2011 George Osborne Tax and spending Economic policy Recession Danny Alexander Toby Helm Heather Stewart guardian.co.uk