Chancellor to court medium earners in ‘steady as she goes’ budget despite rise in inflation and borrowing

George Osborne has told the cabinet his budget will set out the government’s plans to reform and rebalance the economy and help struggling families with the cost of living.

The chancellor will seek to appeal to Britain’s “squeezed middle” when he announces help for first-time buyers, motorists and 25 million income tax payers in a budget designed to tighten the Treasury’s grip on public spending.

Osborne briefed senior ministers including the prime minister, David Cameron, on the contents of his second budget at an 8am cabinet meeting at 10 Downing Street

Despite disappointing news for the public finances, the chancellor is expected to say that he has scope to raise the income tax personal allowance by £600 next year, fund a £250m shared equity scheme for new homes and defer the above-inflation increase in petrol duty due next month.

But he will balance tax giveaways with tax-raising measures, a crackdown on tax avoidance and “special measures” for overspending Whitehall departments in what sources insisted would be a “steady as she goes” package.

Cameron’s official spokesman told reporters: “The chancellor took the cabinet through the budget and set out the main aims … which are to set out our plans for reforming and rebalancing the nation’s economy and steps to help families with the cost of living.”

Osborne will outline a range of measures including a shake-up of planning laws, deregulation of employment laws affecting small businesses, and long-awaited plans for a green investment bank as the coalition seeks to shift the focus of the economy from deficit reduction to boosting growth.

The chancellor will admit that the UK’s growth prospects for 2011 have worsened since the autumn, with the independent Office for Budget Responsibility likely to pencil in an increase of around 1.8% in gross domestic product this year against the 2.1% it forecast in November.

But Osborne will signal his determination not to let the government’s deficit reduction plans slip, with controls designed to intensify pressure on ministers to rein in spending.

Departments failing to manage their budgets properly will be placed in special measures – akin to the Ofsted rating given to a failing school – with tough penalties.

These could include fines for overspending or being forced to seek Treasury authorisation for larger spending decisions.

City hopes that public borrowing for 2010-11 would come in £10bn below the £148bn forecast were dented by news that the deficit in February topped £10bn – the highest for the month since modern records began in 1993.

Meanwhile, inflation according to the consumer price index rose from 4% to a 28-month high of 4.4% last month, pushing up government spending on state benefits.

Dearer food, fuel and clothing were the main factors behind last month’s jump in inflation, which is now more than double the government’s 2% target.

The increase in the CPI measure of inflation was matched by a rise in the alternative yardstick of the cost of living, the retail prices index, which rose from 5.1% to 5.5% last month, its highest for 20 years.

In a move that will please the Liberal Democrat wing of the coalition, Osborne will say that the income tax personal allowance – due to go up to £7,475 next month – will be raised by more than inflation from next year.

The increase of around £600 – which comes on top of the £1,000 rise next month – will be worth an average of £45 a year for taxpayers earning up to £115,000 a year.

The 550,000 taxpayers who earn more than £115,000 will lose £45 a year because they no longer have a personal allowance.

Osborne will announce a joint scheme with the construction industry to help some of the potential first-time buyers currently frozen out of the housing market.

First-time buyers with a household income of less than £60,000 a year who can put down a 5% deposit on a new home will be eligible for an equity loan worth up to 20% of the value of the property jointly funded by the government and housebuilders.

The loan will be interest-free for five years, and will only be repayable when the house is sold.

With most first-time buyers only able to secure mortgages worth 75% of a property’s value, Osborne is expected to say his scheme will give some young people the chance to meet the exacting loan standards demanded by lenders in the wake of the financial crisis, lead to the building of 10,000 new homes and protect 40,000 jobs in the construction industry.

The year-long cabinet battle over Britain’s ability to invest in the next generation of green infrastructure will be resolved when a green investment bank is established with access to up to £3bn of funds, and an ability to borrow from April 2015.

Green groups will be disappointed about the deferral of borrowing powers but pleased at the higher than expected interim funding.

The battle over the bank was resolved on Sunday, and the outcome reflects a wider political struggle to ensure plans in the budget to ease pressure on the squeezed middle, including freezing planned fuel duty rises, do not strip the coalition of its green credentials.

Ministers admit the deferral of the bank’s borrowing powers to 2015-16 reflects Treasury determination to ensure net debt as a percentage of GDP is falling by 2015-16.

But they also argue that decisions on the next big wave of green investment projects, including offshore wind farms, do not need to be made until after 2015.

In a negotiating success for Chris Huhne, the energy secretary, the bank will be given access to £1bn of funds from 2012-13, as opposed to the earlier plan to wait until 2013-14.

The bank will also be given access, from 2012-13, to £775m from the asset sales from HS1, the superfast rail track between London and the Channel tunnel.

In addition, the bank will have access to £1bn from the sales from 2013-14 from Urenco, the company that makes enriched uranium from nuclear power. The government owns one-third of Urenco jointly with the Dutch government and German energy companies RWE and E.On.

The Treasury has given a guarantee that if the income from the sale of Urenco is not forthcoming, the green bank will have access to other funds.