Tax cuts for low and middle-income earners are being planned by the Government in an attempt to limit the pain and the duration of the economic downturn. Alistair Darling, the Chancellor, intends to include limited tax reductions in his pre-Budget report later this month.
Ministers said a combination of targeted tax cuts and a speeding up of government building projects – to be financed by higher borrowing – would complement the interest rate reductions in a three-pronged strategy that would hopefully allow Britain to bounce back as quickly as possible from the looming recession. "We have got to use all the levers at our disposal," one said.
Many also believe the move would undermine David Cameron, who has resisted pressure from his own party to promise up-front tax reductions. The proposal emerged as mortgage lenders bowed to intense political and public pressure by cutting their rates for millions of borrowers yesterday. The Nationwide Building Society, HBOS, the RBS/NatWest group, Scottish Widows, Northern Rock and Bradford & Bingley all announced that they would bring down their main variable lending rates on 1 December by the full 1.5 percentage points by which the Bank of England reduced its base rate on Thursday. Lloyds TSB and Abbey cut their rates on the same day.
The cuts will reduce the monthly cost of a typical £150,000 mortgage by £138, while people with a £250,000 loan will see their repayments fall by £230 a month. Ministers argue that lower taxes would help people struggling in the downturn and boost demand in the economy. The Tories are likely to accuse Mr Brown of using tax reductions to sugar the pill of a massive hike in borrowing that would have to be funded by big tax rises after the next general election.
Yesterday, Mr Brown would not be drawn on specific proposals but said that there was an emerging international consensus that interest rate cuts should be matched by fiscal policy – ie taxes and spending.
Asked whether there would be fiscal stimulus to the economy, he said: "We will take the necessary action on monetary policy with cuts in interest rates and in the decisions we have taken on taxes and spending, to ensure that we come through this downturn. In other downturns, hard-working families and people on middle and lower incomes have not had the support that we are now prepared to give."
Mortgage lenders, accused of dragging their feet after the Bank of England cut interest rates to their lowest level for more than 50 years, backed down after Mr Darling "read the riot act" to seven of their bosses at a tense breakfast meeting at the Treasury yesterday.
The Chancellor told them bluntly that the public expected to see them pass on the 1.5 percentage point cut to their customers after the Government's unprecedented £500bn bank rescue plan last month. Mr Darling warned them there would be "repercussions" if they did not "act collectively" but did not need to spell out what he would do if they refused. "They buckled," claimed one Treasury insider. "It was a satisfactory outcome."
The bosses of RBS, Barclays, Lloyds TSB, HBOS, Standard Chartered, HSBC and Nationwide promised to pass on "all or most" of the Bank of England's cut. However, some homebuyers with tracker mortgages may not reap the benefit, and in future, new mortgages may be linked to the rate at which banks lend to each other. At 4.496 per cent, it is significantly higher than the 3 per cent base rate. Mr Brown said he was "pleased" about the rate cuts but said the mortgage lenders had reached the decision themselves. "I welcome the fact that a number of British banks have now decided to pass on the cut to customers, to families and to businesses," he said.
The Council of Mortgage Lenders warned that the precise level of any reductions would be a commercial decision for each lender. "Banks ... have limited funds and don't have enough money to give to all the customers who may want[it]," said Michael Coogan, its director general. "Over the next few days and weeks, we will see banks and building societies move by anywhere between 0.5 per cent and 1.5 per cent – the decisions will be on the basis of what they want for their savers as much as what they want for their borrowers."
Mr Cameron called for greater protection for people in debt who are at risk of losing their homes or having bailiffs "steal" their possessions. He said no one with less than £25,000 of unsecured loans or bills should be forced to sell their house in order to make repayments. He added that in the current economic climate, the Government should also scrap plans to allow debt collectors to break into property to reclaim goods.
But Jack Straw, the Justice Secretary, said: "None of the provisions of the legislation to which David Cameron is referring today have been implemented." He has asked his department to review the enforcement provisions of the Tribunals, Courts and Enforcement Act. "I will not agree to the implementation of measures on charging orders until I am satisifed that they will not have an adverse effect during these difficult economic times," he said.
Osborne's 2 per cent approval rating
George Osborne's meeting with the Russian oligarch Oleg Deripaska and his weak response to the economic crisis have led to calls from Tory MPs for him to be replaced. A survey of 1,600 party activists shows his approval rating has fallen from 70 per cent to 2 per cent. Some in his party have been frustrated by his inability to link Gordon Brown's stewardship of the economy as Chancellor with the financial crisis. William Hague has been touted as a replacement.
Explainer: Who benefits?
*Most of Britain's largest lenders bowed to pressure from the Government and cut their standard variable mortgage rates (SVRs) by 1.5 percentage points yesterday, passing on the full benefit of the cut made by the Bank of England on Thursday.
In the short run, the main beneficiaries of that move will be the one million or so families who have discount mortgages – which are linked directly to their lender's SVR. The average household with a discount mortgage will see at least £100 wiped off their monthly repayments as of next month. The other people who will benefit are the half a million or so who have come to the end of their fixed-term mortgage deal and are now paying their lender's SVR. This group is growing in number, as more families struggle to find a lender who will offer them a new mortgage, once their old deal comes to an end. Many lenders will no longer lend to customers who have less than 10 per cent equity in their property. Yesterday's cuts mean that the prospect of being forced to revert to your lender's SVR is not so daunting. James Daley