Cameron defends VAT hike amid dire warning

The Prime Minister played down a senior Minister's comments there were "risks" with the coalition's austerity Budget but the Government faced criticism as the Institute for Fiscal Studies (IFS) said many of the measures will hit the poor hardest.

Some Government departments could see their budgets slashed by up to a third as a result of the Chancellor's austerity package which also targeted welfare handouts, froze child benefit, hiked capital gains tax and imposed a two-year pay freeze for public workers, the IFS said.

"We are looking at the longest, deepest, sustained period of cuts to public services spending at least since World War II," IFS director Robert Chote said, adding that government claims the Budget was "progressive" were "debatable".

The warning came after George Osborne signalled the coalition was preparing a fresh round of benefit cuts in the wake of the 11bn Budget squeeze, suggesting if further savings could be found from the welfare budget then other public services might be spared more savage cuts in the autumn spending review.

Criticism of the Budget was fuelled by Business Secretary Vince Cable who told MPs the 40bn package of tax increases and spending cuts was based on the urgent need to balance the potential dangers of acting now compared to doing nothing. He also defended the Liberal Democrats' U-turn on hiking VAT to 20 per cent, a "bombshell" they accused the Tories of planning during the election.

Many Liberal Democrat MPs and activists are uneasy over the move but Mr Cable said he changed his mind because senior officials in the Bank of England had told him there was a "serious threat" to the economy.

Questioned by Labour over the "massive gamble" the Government was taking, Mr Cable said: "You say it's a gamble, there is a risk. There are risks of tightening fiscal policy too quickly, of course there are risks. But there are risks of doing nothing or less."

But last night Mr Cameron denied there was a danger as he and Deputy Prime Minister Nick Clegg were grilled by a television audience.

Asked whether he accepted it was a risk, the Prime Minister said: "I don't accept that. If you look at the reaction of the CBI, the chambers of commerce, what the Bank of England have said and others, they all recognise the alternative to this Budget is a real risk of higher interest rates, of lack of confidence, of falling investment."

Earlier Labour's acting leader Harriet Harman had clashed with Mr Cameron in the Commons, accusing the Government of not being "straight" with the public and concealing the fact that families earning over 25,000 would lose tax credits while pensioners would suffer.

Hemsworth Labour MP Jon Trickett said the rise in VAT was "highly regressive" for poorer people while Shadow Health Minister Diana Johnson, MP for Hull North, mocked Mr Cable over his reputation as an economist.

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