Government debt to rise to highest level since war

Official acknowledgement of the scale of the UK's slide into recession will be revealed by the Chancellor, Alistair Darling, today. Experts believe that a growth forecast of between zero and minus 1 per cent next year will be delivered, a dramatic downgrade.

The scale of the downturn will be used as justification for an extraordinary series of measures that will see the UK government borrowing climb to almost £200bn over the next few years – the highest since the Second World War. At £76bn this financial year and almost £120bn next, public sector net debt in 2009-10 is set to rise to almost 10 per cent of GDP, way above the previous peak of 8 per cent, or £110bn in today's terms, set in 1993. It will also place an enormous strain on the gilts markets, and may further undermine sterling.

The Chancellor will deliver a historic package of measures that will slash VAT from 17.5 per cent to 15 per cent, a move designed to offer immediate assistance to the nation's hard-pressed shopkeepers and give an instant bonus to household budgets. A boost equivalent to between 1 and 2 per cent of GDP will be announced.

Reports over the weekend suggested strongly that the Treasury is also prepared to shelve changes to corporation tax that have seen many large UK-based companies move their head offices to Ireland and other overseas destinations with a more favourable tax regime for their overseas profits. Mr Darling is thought to be ready to say that he will introduce a tax exemption on foreign dividends. Such a concession was rejected by the Government last year on the grounds of cost and lost revenues. Now that the Treasury is intent on injecting cash into the economy, however, it seems that this is no longer the obstacle it once was. Companies as varied as United Business Media, WPP, Shire Pharmaceuticals, Henderson and Regus have all moved their headquarters to other countries.

After months of lobbying and increasing concern that the banks are refusing to offer credit to viable and profitable small businesses, the Chancellor will also answer calls from industry for specific help on improving cash flow and liquidity. The small firms' loan guarantee scheme will be extended, access to funds from the European Investment Bank will be enhanced, and the Treasury will also launch a full review of the financial difficulties facing small and medium-sized enterprises.

In a letter to the Prime Minister, the director-general of the CBI, Richard Lambert, said: "The most effective way of supporting economic activity and keeping people in jobs would be a temporary reduction in employer national insurance contributions. There are also some other relatively quick and painless things the Government can do that will provide an immediate boost to business, such as scrapping empty property rates relief, a temporary freeze on business rates, and bringing forward some elements of planned capital spending."

Meanwhile the Deputy Governor of the Bank of England for monetary policy, Charles Bean, said over the weekend that the authorities should in future seek to limit the size of booms, and admitted that the Bank and its counterparts around the world did share some of the blame for the recent crisis: "While lax global monetary policy probably played some part in the credit build-up that is now painfully unwinding, it was only one of many parents. I think the real lesson is that, alongside the many other regulatory improvements now under consideration, we need a regulatory regime that works against the natural cyclical excesses of the credit cycle."