GEORGE Osborne will create more high-rate taxpayers in a £1 billion hit on middle-class earners while raiding the pension pots of rich older people for another £1 billion.
Mr Osborne's complicated package of changes in the Autumn Statement will hit those who pay the 40p rate of income tax and wealthier pensioners, who will get less tax relief.
However, there is good news for drivers and low earners. The Chancellor will scrap a planned 3p rise in petrol duty and raise the tax-free personal allowance, so those earning under £9,440 will pay nothing to the Treasury at all.
Mr Osborne will also save £3.7 billion on the welfare bill because most benefit payments will rise by just one per cent - less than inflation. This will effectively mean a cut in child benefit for millions of families.
He will also cut corporation tax further to just 21 per cent, compared with 40 per cent in the US and 33 per cent in France.
His changes to income tax will create winners and losers. More people will have to pay the 40p tax rate, because he is raising the earnings threshold by just one per cent to £41,865 in 2014 and £42,285 in 2015 - below the current rate of inflation. The move will save the Treasury around £1 billion.
However, he will also allow higher rate taxpayers to take advantage of the personal allowance - the amount on which there is no tax payable.
On pensions, the tax free allowance will be cut from £1.5 million to £1.25 million over a lifetime from 2014 onwards. The annual allowance will be cut from £50,000 to £40,000, saving £1 billion.
Mr Osborne also admitted that Britain will miss its targets on reducing the national debt but insisted the economy is "slowly healing".
The Chancellor said the economy is taking longer than expected to recover and the deficit is "far too large for comfort" because of the debt crisis in Europe.
In his Autumn Statement, he said it will take four years to get Britain's debts lower, rather than three as he previously promised.
However, the Chancellor said he hopes to meet another target on balancing Britain's books by reducing the deficit within five years.
Mr Osborne said the country is "heading in the right direction" as he laid out spending and taxation plans. He will cut Whitehall spending by at least one per cent - or £5 billion - but will not increase taxes overall as any rises will be offset by cuts elsewhere.
He said it is possible to "restore sanity to public finances" at the same time as improving public services.
"It's taking time, but the British economy is healing," he told MPs. "People know there are no quick fixes... but they want to know that we are making progress. We are making progress. It's a hard road, but we are getting there.
"Britain is on the right track and turning back now would be a disaster."
He said independent forecasters have downgraded Britain's growth predictions for the next five years. The economy shrunk this year by 0.1 per cent, and will grow by just 1.2 per cent in 2013, 2 per cent in 2014, 2.3 per cent in 2015, 2.7 per cent in 2016, and 2.8 per cent in 2017.
Mr Osborne said the independent Office of Budget Responsibility blamed problems in eurozone, which will "constrain growth for several years to come''.
The Chancellor is under pressure to increase infrastructure spending to boost economic growth. He said capital spending on major projects will increase to £33 billion, from £29 billion under Labour.
He also promised to pump billions of pounds into improving Britain's transport system. Capital investment in infrastructure will add up to £5 billion over two years, including upgrades to the A1, A30, and M25. The High Speed 2 rail link to be extended to North West and West Yorkshire, and Northern Line will be extended to Battersea.
There will also be funding to assist building of up to 120,000 homes, £600 million in science, £270 million for further education colleges, and £1 billion for schools.