To help maintain overall capital spending and cut the deficit the Chancellor said VAT would rise to 20% from January 2011.
But the pledge to maintain existing capital spending after the recently announced cuts will still see total capital investment fall by £100bn over the next five years.
One contractor told the Enquirer: “At first sight it seems the Chancellor has understood that the axe needed to fall on bloated current spending not capital spending.
“But we are not out of the woods yet, he seems to have left plenty of scope to rob Peter to pay Paul in the October spending review.”
The sharp fall in spending stems from recently unveiled cuts ahead of the emergency Budget and effectively maintaining Labour’s planned capital spending slowdown.
Further details on how capital spending will be divided across Government departments will be unveiled on 20 October in the comprehensive spending review.
There will be no further reductions in capital spending in this Budget, Mr Osborne said, explaining that he has learned lessons from government actions of the early 1990s.
He hinted that while capital spending would be maintained at planned levels, certain departmental budgets could be cut as Government prioritised capital spending that positively benefited the economy.
He said: “Well judged capital spending can support economic growth. I have decided that capital spending will not be cut.
“But we will make sure projects give a significant economic return to the government.”
Michael Ankers, chief executive of the Construction Products Association said: “While there may be some relief that the Chancellor did not make further cuts in capital spending from those already announced by the last government, the impact of what is set out in this Budget should not be underestimated.
“In 2014/15, capital spending will have fallen by a third since 2009/10. At this level it will be very difficult to maintain the built environment of this country in its current condition.”
Osborne confirmed the Government was backing key infrastructure projects like the Tyne and Wear metro upgrade, rail links to Sheffield and between Liverpool and Leeds, and the Birmingham New Street redevelopment.
He also announced plans to set up a regional growth fund to provide finance for projects over the next two years.
“We will announce the details shortly but priority will be given to projects that have the greatest impact on innovation and jobs, “ he said.
Other measures:
- Growth fund for regional infrastructure over two years
- Corporation tax dropped 1% annually until falls to 24% after four years
- Small companies tax rate cut to 20% next year
- Employers’ National Insurance threshold is to rise
- From midnight, higher earners will see capital gains rise from 18% to 28%
- Personal tax allowance increase £1,000 from next April
- Higher income tax rate frozen
- Bank levy from 2011 to raise £2bn annually
- Child benefit will be frozen for the next three years
- New maximum limits on housing benefits
- Unprotected spending departments see 25% spending cuts over four years
Labour’s deputy leader Harriet Harman said the Budget would mean lower growth next year than forecast.
She said: “Today’s Budget is bad for jobs.”