VAT, tax cuts to kick-start UK economy

The UK government will spend billions of borrowed pounds to fund tax cuts in the hope of preventing a recession spiralling into a slump, Chancellor Alistair Darling said in a pre-budget report in Parliament yesterday.

Mr Darling also announced a temporary cut in value-added tax.

VAT was reduced to 15 per cent - the lowest level allowed by the EU - from 17.5 per cent, boosting consumers' spending power before Christmas.

Chancellor Darling said he would cut sales tax and extend help for small businesses, low earners and households in a package worth up to £16 billion, or just over one per cent of gross domestic product. But he said tax cuts now would mean rises later, including an increase in income tax for high earners - deferred until after the next election.

The move is a major policy shift for the ruling Labour government and would mark the first time that income tax has been raised since 1975.

"These are extraordinary, challenging times for the global economy. And they are having an impact on businesses and families right across the world," Mr Darling said.

The stakes for Labour are high: the country is sliding into recession, house prices are tumbling, unemployment rising and manufacturing output shrinking. Mr Darling's fiscal boost is being matched, in some shape or form, across much of the world as the global economy sours.

The European Commission will present plans tomorrow to boost the EU economy, and US President-elect Barack Obama has laid the ground for a massive new US stimulus package, combining middle-class tax cuts and infrastructure spending. To pay for it, Mr Darling said Britain's public borrowing would balloon to around £118 billion in the next financial year, about eight per cent of GDP and way above the £38 billion he forecast in March.

British Prime Minister Gordon Brown's chances of winning the next election, due by mid-2010, may depend on a short, shallow recession - but a limited downturn is looking unlikely.

Mr Darling slashed his economic growth forecasts to 0.75 per cent this year and negative growth of between 0.75 per cent and 1.25 per cent next year. In March, Mr Darling forecast growth of about two per cent this year and around 2.5 per cent in 2009.