George Osborne is considering tax cuts for low and middle earners in his March Budget in an attempt to kick-start growth after figures showed that the economy is contracting.
The Chancellor will consider speeding up the Coalition's plan to raise the personal tax allowance to £10,000 a year by 2015. The move would help families in the "squeezed middle" and enable them to spend more – in the hope this would get the economy moving again.
The personal allowance was raised from £6,475 to £7,475 this financial year and will go up to £8,105 in April, putting the Coalition on course to hit the £10,000 target by the next election and take more than a million people out of the tax net.
Nick Clegg has urged Mr Osborne to take speedy action, a case strengthened by yesterday's figures from the Office for National Statistics which showed that the economy shrank by 0.2 per cent in the final three months of last year.
Ministers fear another negative figure for the first quarter of 2012, plunging Britain back into a double-dip recession which would put a huge question mark over their deficit-reduction strategy.
The gloomy figures added to pressure on Mr Osborne to adopt a Plan B for the economy. Olivier Blanchard, inset, chief economist at the International Monetary Fund suggested Britain had room to slow the pace of the cuts to avoid strangling the economy.
He told the BBC: "If growth is really dismal then you may decide you're going to go a bit more slowly about the discretionary part of the budget... to the extent that these countries are not under the gun from the markets, have plausible medium-term plans, they can slow down and it would help."
David Cameron will today address business and world leaders at the World Economic Forum in Davos, Switzerland. "This is a time to show the leadership our people are demanding," he will say. "Tinkering here and there and hoping we'll drift to a solution simply won't cut it any more. This is a time for boldness not caution. The Prime Minister will also say Europe's lack of competitiveness remains its "Achilles heel" and that it has failed to deliver the structural reforms it needs.
Mr Clegg, who will spell out his Budget demands in a speech to the Resolution Foundation think tank, will say any tax cuts for the "squeezed middle" would have to be paid for by higher taxes for the rich, rather than higher borrowing or deeper spending cuts.
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