Darling on the defensive over 'unravelling' Budget

The Tories claimed yesterday that the mini-Budget had already "unravelled" as the Government was forced on to the defensive by claims that it planned to raise VAT to 18.5 per cent.

Opening an emergency three-hour Commons debate on Monday's pre-Budget report (PBR), the shadow Chancellor, George Osborne, seized on a document mistakenly put on a government website saying VAT would go up from 17.5 to 18.5 per cent in 2011. It will be reduced to 15 per cent on Monday but revert to 17.5 per cent in January 2010. Mr Osborne asked why the Treasury minister Stephen Timms had "signed off" the document on Monday. Accusing Labour of having a "secret tax bombshell", he challenged the Chancellor, Alistair Darling, to confirm or deny that the Government also considered a further rise to 20 per cent in 2012.

The shadow Chancellor said the PBR had started to unravel as soon as it was delivered. The doubling of the national debt shocked the entire country, he said. National insurance rises would hit people on modest incomes, the Chancellor had been "less than candid" about "stealthy duty" rises on drinks and petrol and there was a "£100bn black hole" in tax revenues, with no explanation of how it would be filled, he went on. Yesterday, Mr Darling halved an 8 per cent rise in the duty on Scotch whisky, announced on Monday, after protests by the industry.

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"Normally it takes a week or so for the Prime Minister's Budget to come unstuck. This one has completely fallen apart in just 48 hours," said Mr Osborne. Amid noisy Commons exchanges, the shadow Chancellor accused the Government of "peddling fantasy figures" about when the budget would move back into surplus and planning "temporary tax giveaways and lifetime rises in tax afterwards".

Mr Osborne concluded: "Now their emergency Budget is unravelling, their secret tax bombshell is revealed, their scorched earth policy is leading this country's economy to ruin. They have run out of money and the sooner they are run out of office the better."

Replying, Mr Darling admitted the Government had considered a "large number of options" but insisted Mr Timms never saw the plan for an 18.5 per cent VAT rate or signed the memorandum. He said someone within the Treasury or HM Revenue & Customs had typed the minister's name on a document he did not know about and had never authorised.

He said: "I concluded that, as I had to raise money in order to ensure that our borrowing is reduced in the medium term, the best and fair way to do it would be to increase national insurance contributions by 0.5 per cent."

Although the debate was ordered by the Speaker, Michael Martin, rather than called by the Government, Mr Darling welcomed the opportunity as a chance to set out a "clear choice" for the country. He said: "There is a choice between supporting people, supporting businesses, supporting the economy as countries are now doing across the world. Or walking away, saying we will do absolutely nothing and letting recession run its course."

Vince Cable, the Liberal Democrats' Treasury spokesman, backed the Government's decision to opt for a "fiscal stimulus", saying "drastic action" was needed in the "economic emergency". He said what was being hidden was not a "tax bombshell" but a drastic cut in public spending.

Kenneth Clarke, the former Tory chancellor, said Britain probably faced its "longest and deepest recession" for more than 60 years and the world its worst financial crisis for 80 years. He warned: "This is, at heart, a banking and a credit crisis. Unless and until we get back to the normal functioning of the banking system, we won't have restored the British economy to health. The big gap in government policy is they still have not produced a credible package to get the banking system functioning properly again. We are a million miles from that at the moment."

Ruth Kelly, the former transport secretary who left the Cabinet last month, said the PBR had redrawn the dividing line between the two main political parties "perhaps for years to come". The Tories had made an "absolutely historic mistake" by opposing a fiscal stimulus, she said.

Earlier at Prime Minister's Questions, Mr Brown refused to deny a claim by Mr Cameron that the Government considered pushing VAT above 18.5 per cent. "We considered all options but we rejected options," said Mr Brown. "We rejected the option of raising VAT. We decided we would lower it." The Tory leader challenged Mr Brown to confirm the PBR would double the national debt. He said it was not about helping the country's economic situation but the Prime Minister's political situation.

It emerged yesterday that an 18.5 per cent VAT rate was dropped in last-minute negotiations between Mr Darling and Mr Brown. Asked if the Prime Minister had rejected it, Mr Brown's spokesman said: "No, the Chancellor was against it that is why he did not announce it." The spokesman insisted Mr Brown had no plans to raise VAT beyond 17.5 per cent.