Alistair Darling on Wednesday signalled that the British economy is at the mercy of events in the financial markets as he unveiled a modest maiden Budget, ratcheting up borrowing and raising taxes on drinkers, motorists and business to help fill a hole in the public finances.

Even as he downgraded his growth forecasts, the chancellor struck an optimistic tone on the likely duration of the credit squeeze. However, the Treasury admitted that protracted turmoil in the financial markets could further dent growth prospects.

In spite of his desire not to take too much money out of the economy, Mr Darling was forced to raise taxes to pass the government’s self-imposed rule on public debt and make progress towards its goals on reducing child poverty.

Presenting what he described as a “responsible Budget“ that will secure stability in these times of global economic uncertainty”, the chancellor downgraded growth forecasts for this year and next, and raised the borrowing forecast by £20bn over the next four years.

Higher borrowing will raise public sector net debt to 39.8 per cent of national income in 2010-11, just a squeak below the Treasury’s ceiling of 40 per cent.

Transcript of the chancellor’s speech - Mar-12Had Mr Darling not raised taxes by £2bn in the same year, rising to £2.5bn in subsequent years or had forecast slower economic growth, he would have hit his debt limit.

The most striking tax increases were on alcohol, with 9 per cent increases to be introduced on Monday. This will add 4p to a pint of beer, 14p to a bottle of wine and 55p to a bottle of spirits. The increases would be followed by further hikes of 2 per cent above inflation until 2013.

Other significant tax increases came from new higher rates of vehicle excise duty for “gas guzzlers” and an abolition of lower duty rates for biofuels. As part of what he presented as a package of eco-friendly measures, he announced that from 2010, owners of the most polluting cars will pay £950 in road tax in the year of purchase, double the rate for subsequent years, while biofuel will lose the 20p per litre subsidy it currently enjoys.

Mr Darling also aimed to raise another £600m from clamping down on tax avoidance schemes used by some companies.

The chancellor’s aides were satisfied that the Budget was perceived by many as boring, having endured “a little too much excitement” over the past six months. But David Cameron, the Conservative leader, said the borrowing figures were “truly dreadful’’.

However, the Tories were privately delighted with Mr Darling’s announcement of a continued public spending squeeze from 2011 to 2013, with growth of just 1.9 per cent a year in the early part of the next parliament.

That squeeze will make it easier for Mr Cameron to fight the next election promising to match Labour’s tight public spending plans, while facing down calls from the Tory right to cut spending – a policy he regards as political suicide.

Economists warned that the Budget arithmetic relied heavily on Mr Darling’s judgment that the global credit crunch would be temporary. The Treasury itself highlighted the risk the squeeze “could detract from the average rate of output growth over the medium term” if the problems were more persistent.