Balls unveils plan for kickstarting economy

The world is in danger of a 1930s-style depression because of a combination of weak demand, governments trying to slash deficits and political paralysis, Ed Balls warned last night.

The shadow Chancellor delivered a grim assessment of the pressures piling on the global economy, telling The Independent's fringe meeting: "The parallel is the 1930s." He said: "It is a very dangerous time – the most dangerous time in my lifetime."

Mr Balls warned that the eurozone countries could not agree how to tackle their crisis, that there was political deadlock within the US and that the Coalition had embarked on the wrong strategy of cutting too deep, too fast. "It's hard to see how in the eurozone or America it's going to get better in the next 12 months," he told the packed meeting. He forecast stagnation across the world economy, with faltering growth and rising unemployment.

Mr Balls admitted that Labour had made mistakes in not seeing the financial crisis coming, telling the audience that they just "didn't spot" it. But he said he had no regrets about increasing funding for the NHS.

"Of course we made some mistakes," he said. "People are obviously angry about what happened under our watch and they want us to acknowledge that. But I'm not going to say we spent too much money on the NHS."

Earlier, he called for a five-point emergency plan to breathe life into the beleaguered economy as he claimed that the Government's austerity measures were "hurting but not working". The Tories countered that the package would cost almost £22bn, charging him of being "dangerously addicted to debt".

Mr Balls warned activists they had to accept heavy cuts in public spending in a drive to tackle the deficit, repeatedly warning that Labour's plans had to be credible to rebuild trust with the voters.

The shadow Chancellor urged five steps to stimulate the economy:

* Cut VAT to 5 per cent on property improvements and repairs for one year to "help homeowners and the many small businesses so dependant on the state of the housing market". The move, modelled on a scheme in France, would cost between £100m and £500m, aides said.

* Reverse January's "damaging" rise in VAT from 17.5 per cent to 20 per cent, putting an extra £450 a year in the pocket of average families. This previously-announced plan would cost an estimated £12bn, leading to accusations of a black hole in Mr Balls's calculations.

* Announce a one-year national insurance tax break for every small firm that hires extra staff. Labour said there was already £1bn in the Chancellor's budget to cover the move.

* Repeat the last Government's one-off tax on bank bonuses, using the cash to build 250,000 homes and guarantee jobs for 100,000 young people. It would raise £2bn; the coalition Government counters that its levy on banks' balance sheets will collect more.

* Bring forward investment on schools, roads and transport. There were no immediate costings on this.

Mr Balls said Labour should have done more to improve skills, should have adopted tighter controls on Eastern European workers, made mistakes on spending and should have imposed tougher regulation on the banks. But he argued that global forces, rather than Labour's stewardship of the economy, were responsible for the problems facing the country.

"It wasn't too many police officers or nurses or teachers here in Britain that bankrupted Lehman Brothers in New York," he said.