The ISA allowance limit will go up to £10,680 from April 2011, quelling fears that ISAs could be a victim of the Comprehensive Spending Review.

The total allowance for the scheme will be linked to September’s Retail Prices Index (RPI) rate which was 4.6 per cent; this will be rounded-up to the nearest £120, making the increase 4.7 per cent for next April.

The Treasury confirmed the increase on 15 October, which follows the announcement in the June Budget that the ISA allowance would be linked to inflation.

Half of the ISA allowance can be invested in a cash ISA account paying tax-free interest, from next April the maximum that can be invested in a cash ISA will be £5,340.

ISAs allow investors to save a certain amount each financial year tax-free. The full ISA allowance can be invested in shares or half can be invested in cash, and the remainder in a stocks and shares ISA investment.

The coalition government received a boost ahead of the Comprehensive Spending Review (CSR) due to take place on 20 October, after the economic research house the Ernst & Young Item Club published its quarterly forecast.

The forecast said that CSR would help reduce uncertainty and stimulate business investment, which is forecast to increase by 1.8 per cent this year and by as much as 9.0 per cent next year.

Chief economic adviser, Peter Spencer, said: “Wednesday’s announcement should peel away another layer of uncertainty from the economic outlook and encourage businesses to loosen the purse strings, in much the same way that the formation of the Coalition government and the June Budget did earlier this year.”

Spencer did warn that a lot still hung in the balance for the UK economy, with much of the recovery dependent on the extent to which businesses can increase their overseas income flows as the home market stagnates.

Spending plans criticised

In a speech ahead of the CSR, the new Labour shadow chancellor, Alan Johnson said ‘the Tory plan is a huge gamble with growth and jobs’ and called for ‘targeted tax changes’ to take on a greater share of efforts to reduce the government’s deficit.

Writing on the Guardian’s Comment is Free website, David Banchflower,a  former member of the Bank of England monetary policy committee compared the financial crisis to an ‘economic war that has hit us hard’.

Banchflower said the coalition government’s response was the equivalent to ‘surrendering immediately because of the potential impact of the war on the deficit.’

“Contrary to claims made by various members of the government, there is no believable evidence that fiscal tightening on the scale that is being proposed ever worked,” Banchflower said. He also questioned whether the markets were demanding the level of deficit reduction planned.

Responding to Alan Johnson’s comments, the co-chair of the Liberal Democrat parliamentary treasury committee Stephen Williams said: “His aim to halve the deficit still leaves us with crippling interest payments at the expense of future public spending.

“He has called for more tax rises rather than cuts, but he fails to say where these should come from.”

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