£1bn tax raid on middle classes as Cameron warns they must share pain of spending cuts

David Cameron warned yesterday that the better-off must share the pain of repairing public finances.

He said tax credits for households on £50,000 a year or more could no longer be justified.

Cutting them back at that level would mean 130,000 families losing an average £500 a year. But the Institute for Fiscal Studies has suggested that going further, tapering the benefit to exclude all middle-income families, could save £1billion a year.

The Tory leader also hinted that his flagship inheritance tax cut may take several years to implement - and raised the prospect of new road tolls.

Mr Cameron said: 'In saying to the country that we need to reduce public spending, we need to get the budget balance under control, we've got to be able to demonstrate to people that this is fair and seen to be fair and that everyone is putting their shoulder to the wheel.

'And that means the wealthy have to pay their fair share.'

But he risked angering Right-wing MPs by insisting that the budgets for overseas aid and the NHS would not be touched - and would continue to grow. Insulating those areas will mean deeper cuts elsewhere.

In his toughest message yet on public finances, Mr Cameron said it was time to 'look the British public in the eye' and make it clear 'we are going to cut public spending'. A Tory government would start at the centre by reducing the number of MPs and having fewer ministers.

Mr Cameron contrasted his approach with Gordon Brown's refusal to accept that cutbacks will be necessary. He said that, rather than being a 'catastrophe', spending cuts offered a 'big opportunity' to reform public services.

He pointed out that Britain was forecast to borrow 14 per cent of national income next year - twice as much as when Labour Chancellor Denis Healey had to go cap-in-hand to the International Monetary Fund for a loan in 1976.

Meanwhile, Chancellor Alistair Darling promised to begin spelling out the 'hard choices' Labour will make on future public spending.

Making it clear he does not share the 'Tory cuts versus Labour investment' line favoured by Mr Brown, he admitted: 'There are some things you simply can't do at the rate you wanted to do them; there's some things you may have to put off; there's some things you may have to decide, in the light of what's happening, we're not going to do them.'

Mr Darling said: 'You have to set out those priorities. Politics is about choices, and people when they go to the polls - whenever it is - will want to know where all three political parties stand.'

He admitted there was 'no doubt' Britain was 'going through the deepest downturn/recession that we've seen in well in excess of 60 years'.

Mr Cameron said voters were 'crying out for someone who's going to say "right, we are all in this together, we've got to take these steps together"'.

As part of an honest and frank conversation about balancing the books 'elements' of middle-class welfare payments would have to be re-examined.

He suggested the first step would be rein in tax credits by axing payments to middle-income families. Currently, they qualify for child tax credit if household income is below £58,000 - or £66,000 with a child less than a year old.

'Tax credits we support,' Mr Cameron said. 'They're a good idea to get payments to working families on low incomes - but they go to families who earn over £50,000, so we have to look at that.' Right-wing think-tanks have suggested means-testing child benefit and winter fuel allowances as another way of cutting the middle-class welfare bill.

On inheritance tax, Mr Cameron said raising the threshold to £1million was something the Tories 'want to do, obviously, in a Parliament' - suggesting it may not be for be several years.

He also confirmed that Labour's new 50p tax rate on people earning £150,000-plus would not be scrapped in the early days of a Tory government. It was a 'bad tax rise', he said, but 'not in the list of things that we can get rid of quickly'.

The Tory leader said he was happy to look at introducing new road tolls. Liam Byrne, Chief Secretary to the Treasury, accused Mr Cameron of 'a poisonous ideology and poor accounting'.