Gordon Brown promised today to use tax cuts to inject new vigour into the British economy and reduce the length and depth of the recession.
Mr Brown was speaking ahead of this afternoon's Pre-Budget Report in which Chancellor Alistair Darling is expected to announce a 2.5 per cent cut in VAT - to be paid for in part by increasing income tax on the wealthy after the downturn has concluded.
Speaking to the CBI conference in London, Mr Brown rejected the Conservative argument that tax cuts now will simply store up a "tax bombshell" for the future.
The failure of Conservative administrations to act early during recessions in the 1980s and early 1990s meant that the downturns lasted longer, causing more economic pain in the long term, he said.
Letting the recession run its course is not an option, said the Prime Minister. The Government must offer "help when help is needed, not when it is too late".
And, in a direct attack on David Cameron's approach, he warned: "To fail to act now would not only be a failure of economic policy, but a failure of leadership."
Mr Brown rejected the orthodoxy of recent decades which states that monetary policy on interest rates should be the Government's principle macro-economic tool.
Insisting that "extraordinary times require extraordinary action", he said that fiscal policy on taxes must also be used to prevent a deep and lengthy recession.
By protecting the British economy now, the Government can actually prevent higher tax and interest rate increases in the future, he argued.
Mr Darling is expected today to announce a higher rate of income tax for top earners as he sets out how he will claw back a multibillion-pound boost to the shrinking economy.
The Chancellor is thought to be unveiling the plan for a 45 per cent top rate on people earning at least £150,000 a year in his Pre-Budget Report this afternoon.
But the new tax band will not be introduced until after the next general election, which must be called by May 2010 at the latest.
It is thought to be among a series of deferred tax increases designed to bring down borrowing incurred now to fight the recession.
The Pre-Budget Report is expected to see Value Added Tax cut from 17.5 per cent to 15 per cent as part of a £15bn to £20bn "fiscal stimulus" to encourage spending and spur economic growth.
The plans will send borrowing soaring above £100bn, leading to Conservative accusations that Labour is storing up a "tax bombshell" in a reprise of the Tories' 1992 election campaign.
Speaking to the CBI, Mr Brown defended Mr Darling's approach: "Simply letting the recession run its course, to say there is no alternative, is not an option.
"We have seen in previous recessions how a failure to take action at the start of the downturn has increased both the length and depth of the recession.
"That was the mistake made in the recessions of the 80s and 90s, a mistake made early on by the Japanese when they faced a banking crisis and the mistake made in the Asian crisis.
"Doing too little too late would mean more damage, more deterioration, the loss of vital businesses, a weaker economy, lower growth, eventually greater fiscal problems and in that event, higher interest rates and higher taxes.
"The best way for taxes to be low in the long term is for us to ensure that the downturn is as limited in length and scope as possible.
"And that means help when help is needed. Not when it is too late."
Mr Brown indicated this morning that the PBR will include details of the future tax rises which will be needed to pay for additional borrowing now.
"To act now means we also have a duty to set out what we will do later," he said. "By showing we will take the necessary decisions in the medium term to guarantee stability, we can act today in a strong, decisive and fair way."
A new top rate of tax would create a widening divide between Labour and the Tories on fiscal policy.
Conservative leader David Cameron announced last week that he would no longer match Government spending plans from 2010/11 and has set his face against today's unfunded spending increases.
Labour has been committed since 1997 to no increases in income tax, including for the duration of this Parliament.
The current top rate of tax is 40p in the pound, and is levied on 4 million people earning more than £39,825 a year. Economists said that a 45 per cent rate on those earning £150,000 or more would hit around 400,000 people.
The deferral of any increases in income tax until after the next election will mean that they will not be introduced unless they are endorsed by voters.
The strategy will only fuel speculation that Labour is plotting a course to a fourth consecutive election victory. Mr Brown insisted yesterday that he was making no plans to go to the country next year.
Today, he promised to invest in the infrastructure, technological development and skills which will help Britain come strongly out of the recession and take advantage of the economic opportunities of the future.
The Government will support investment in low-carbon technology to give Britain a share in a "green economy", expected to be worth as much as 3 trillion US dollars and employ more than 25 million globally by 2050, he said.
Insisting he was "optimistic about the future of Britain", the PM said: "We now have a unique opportunity to do - in a 21st century way - what was done in the 20th century by the American New Deal. As they built roads and bridges to create the infrastructure for the years ahead, we can use this period of adjustment to build both the technological base and human capital to equip us for the opportunities ahead.
"So let me assure you that we will continue our programme of investment in the technological revolution ahead, in the talent revolution and in the environmental revolution."
As well as the VAT change - a temporary measure expected to last about a year - the PBR is expected to include further tax cuts targeted at the least well off.
Other options include postponing the introduction of increased vehicle excise duty for older vehicles and taxpayer-funded guarantees on loans to small businesses.
There are also suggestions of a new three-month grace period for mortgage holders struggling to keep up with their repayments before repossession proceedings kick in.
Further efficiency savings in the public sector will be announced, allowing some expenditure to be used more constructively to fight the recession.
The Prime Minister said the Pre-Budget Report would contain tax measures to help small businesses struggling to pay VAT and National Insurance.
And he also signalled a potential temporary return for tax breaks on empty property.
Asked by business leaders attending the conference what he would do to help firms, he said: "On small businesses and cash flow, and indeed trade credits and areas where small businesses feel that more can be done to help them through the tax system, I believe that you will find this afternoon that action is being taken.
"You raise specifically the difficulty of small companies paying their VAT or National Insurance... I believe you will find this afternoon that a system is put in place to help small companies in exactly that position."
The Government was "looking very carefully" at the impact of recent legislation which means tax must now be paid on empty properties.
"Everybody agreed on the need for action on empty property two years ago but I understand we are in a new situation because of what's happening both to property prices and to the economy itself and you will see announcements this afternoon," he said.
Mr Brown said he hoped to see action from other EU countries "later this week - so that there is a degree of co-ordination between what we do today and what happens in the next few days and I believe that's to the benefit of the economy as a whole".
Asked about the state's multibillion-pound stake in high street banks, he said the Government had "no desire to be a permanent shareholder" and did not want a return to "the age when the Government was expected to invest in absolutely everything".
In contrast to the Prime Minister's focus on tax policy, Mr Cameron told the CBI that "monetary activism" - lower interest rates - should be the Government's main tool to support the economy.
Mr Cameron noted that the Bank of England's Monetary Policy Committee considered a 2 per cent cut in the base rate earlier this month, but scaled it back to 1.5 per cent because of an expectation of a fiscal stimulus in the Pre-Budget Report.
"We have consistently argued that Government must not do anything to make further interest rate cuts less likely," he said.
Mr Cameron told the conference: "The CBI and the Conservative Party are agreed that monetary activism - lower interest rates and getting credit flowing again - is our top priority.
"As your director general said last week, getting the credit markets working properly is much more important than the fiscal boost."
He accused Mr Brown of "misrepresenting" his position as one of inaction.
"This is not walking on by," he insisted. "This is offering sensible, practical and costed help for businesses and families through this difficult time."
Mr Cameron proposed a new Government institution to guarantee new loans, which he said would allow banks to expand lending at a time when they are wary of risk.
"I believe that simply cutting interest rates and then appealing to the banks to pass them on is not going to be enough," he said.
"As well as lowering interest rates, monetary action should mean radical new measures to actually get credit flowing through to businesses."Reuse content