Labour's tax cut gamble

Government will borrow almost £200bn in desperate bid to boost flagging economy
Chancellor to slash VAT to 15 per cent as he tries to revive high street for Christmas

Plans to raise the top rate of income tax for high earners from 40p to 45p in the pound will be announced today as Gordon Brown makes a decisive break with the policies of the Blair era.

In his crucial mini-Budget, the Chancellor Alistair Darling will say that the higher rate would be introduced after the next general election – so as not to break Labour's manifesto pledges since 1997 not to raise income tax rates. The proposed new top rate is expected to apply on incomes above £150,000.

Mr Darling will that "fair" tax increases will be needed to bring the public finances back into balance in the medium term.

He will disclose that government borrowing will rocket to almost £200bn over the next two years to fund an £18bn "fiscal stimulus" – including tax cuts – designed to ensure a "short and shallow" recession.

The Chancellor will predict that public borrowing will soar to £76bn in the financial year as the Government's revenues plummet, and then increase to a record £118bn next year as the recession bites. The worse-than-expected figures dwarf his forecasts in the Budget in March, which were £43bn for the current year and £38bn for 2009-10.

A temporary reduction in VAT, from 17.5 per cent to 15 per cent, will take immediate effect in the hope of boosting consumer spending during this Christmas period. It is expected to last until March 2010. But some Labour MPs are worried about using £15bn of the stimulus to cut VAT because items such as food, public transport and children's clothes are already exempt. People who buy goods such as televisions and adults' clothes would benefit.

Mr Darling will pledge to bring borrowing under control in the medium term through a combination of tax rises, sales of government assets, cutting Whitehall waste and a small slowdown in the planned growth in public spending. Ministers admitted there would be "pain as well as gain".

The Chancellor will forecast that the economy will contract by more than 1 per cent in 2009 but would bounce back sharply in 2010. Mr Darling will target cuts in personal taxation at people on low incomes, including those who lost out from the abolition of the 10p tax rate. He is also expected to help pensioners and motorists.

Some Labour MPs pointed to how huge high street sales last week on VAT-rated items had failed to bring in shoppers, and they fear that a reduction in VAT will have little impact. John McDonnell, who chairs the left-wing Campaign Group of MPs, said: "VAT can form an element of the plan, but it must not be the central element. What we should be doing is targeting measures at the very poorest, who need the help the most. That should mean injecting cash into the economy by helping pensioners, those on benefits and taking people with very poorly paid jobs out of the tax system."

Other Labour backbenchers argue that in times of financial difficulty, shoppers are quick to begin saving money by shopping around and targeting sales, which pushes down costs. "Lowering VAT is not the most sensible way of doing this," said Paul Flynn, the MP for Newport West. "There is going to be plenty of scope for savings provided by shops over the coming months."

David Cameron, the Tory leader, was "highly sceptical" about the VAT cut. "The Government is giving with the one hand and is going to take away with the other hand," he said, "and VAT will soon go back up again and other taxes probably up by more."

Vince Cable, the Liberal Democrats' Treasury spokesman, said: "What we really need is permanent, fully funded tax cuts targeted at those on low and average incomes, through reductions in income tax, rather than giving a temporary VAT cut, which will primarily reward the big spenders who have loads of money."

Ministers will argue that the VAT cut will help all households and that poorer families are more likely to spend the money returned to them in tax cuts than the better off. They will cite support for the move from Kenneth Clarke, the former Conservative chancellor.

Mr Darling will also unveil a "green industry". He plans to reduce household energy bills for a further 60,000 low-income homes through loft insulation and better heating systems; the delivery of 200 trains to be speeded up; and the rail network's capacity to be expanded.

The Chancellor is to expand by £1bn a scheme to underwrite loans of between £1,000 and £1m to small firms, with the risk shared by the Government and banks. A new payment support service will allow small companies to delay tax payments to HM Revenue & Customs. A three-month grace period for people in trouble with mortgage payments is expected to limit the number of home repossessions.

Gordon Brown denied that the package was a gamble and will argue today that to not act now would be "a failure of economic policy" and "a failure of leadership". The Prime Minister will tell the CBI's annual conference in London that "in previous recessions a failure to take action at the start of the downturn has increased the length and depth of the recession ... Doing 'too little too late' would mean more damage, more deterioration – a weaker economy, lower growth, eventually greater fiscal problems and in the event, higher interest rates and higher taxes."

Start your day with The Independent, sign up for daily news emails
Have you tried new the Independent Digital Edition apps?
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs General

Recruitment Genius: Massage Therapist / Sports Therapist / Physio / Osteopath

£12000 - £24000 per annum: Recruitment Genius: An opportunity has arisen for o...

Recruitment Genius: Account Manager / Sales Executive - Contract Hire

£35000 - £60000 per annum: Recruitment Genius: This industry leader provides c...

Recruitment Genius: Project Coordinator

£28000 - £30000 per annum: Recruitment Genius: A Project Coordinator is requir...

Recruitment Genius: Area Sales Manager - Midlands

£20000 - £25000 per annum: Recruitment Genius: This is an exciting opportunity...

Day In a Page

John Palmer: 'Goldfinger' of British crime was murdered, say police

Murder of the Brink’s-MAT mastermind

'Goldfinger' of British crime's life ended in a blaze of bullets, say police
Forget little green men - aliens will look like humans, says Cambridge University evolution expert

Forget little green men

Leading evolutionary biologist says aliens will look like humans
The Real Stories of Migrant Britain: An Algerian scientist adjusts to life working in a kebab shop

The Real Stories of Migrant Britain

An Algerian scientist struggles to adjust to her new life working in a Scottish kebab shop
Bodyworlds museum: Dr Gunther von Hagens has battled legal threats, Parkinson's disease, and the threat of bankruptcy

Dying dream of Doctor Death

Dr Gunther von Hagens has battled legal threats, Parkinson's disease, and the threat of bankruptcy
UK heatwave: Temperature reaches 39.8 degrees on Central Line - the sweatiest place in London

39.8 degrees recorded on Tube

There's hot (London) and too damn hot (the Underground). Simon Usborne braved the Central line to discover what its passengers suffer
Kitchens go hi-tech: From robot chefs to recipe-shopping apps, computerised cooking is coming

Computerised cooking is coming

From apps that automatically make shopping lists from your recipe books to smart ovens and robot chefs, Kevin Maney rounds up innovations to make your mouth water
Jessie Cave interview: The Harry Potter star has published a feminist collection of cartoons

Jessie Cave's feminist cartoons

The Harry Potter star tells Alice Jones how a one-night stand changed her life
Football Beyond Borders: Even the most distruptive pupils score at homework club

Education: Football Beyond Borders

Add football to an after-school homework club, and even the naughtiest boys can score
10 best barbecue books

Fire up the barbie: 10 best barbecue books

We've got Bibles to get you grilling and smoking like a true south American pro
Wimbledon 2015: Nick Bollettieri - Junk balls and chop and slice are only way 5ft 1in Kurumi Nara can live with Petra Kvitova’s power

Nick Bollettieri's Wimbledon Files

Junk balls and chop and slice are only way 5ft 1in Kurumi Nara can live with Petra Kvitova’s power
Ron Dennis exclusive: ‘This is one of the best McLaren teams ever – we are going to do it’

‘This is one of the best McLaren teams ever – we are going to do it’

Ron Dennis shrugs off a poor start to the season in an exclusive interview, and says the glory days will come back
Seifeddine Rezgui: What motivated a shy student to kill 38 holidaymakers in Tunisia?

Making of a killer

What motivated a shy student to kill 38 holidaymakers in Tunisia?
UK Heatwave: Temperatures on the tube are going to exceed the legal limit for transporting cattle

Just when you thought your commute couldn't get any worse...

Heatwave will see temperatures on the Tube exceed legal limit for transporting cattle
Exclusive - The Real Stories of Migrant Britain: Swapping Bucharest for London

The Real Stories of Migrant Britain

Meet the man who swapped Romania for the UK in a bid to provide for his family, only to discover that the home he left behind wasn't quite what it seemed
Cheaper energy on the way, but it's not all sunshine and rainbows

Cheaper energy on the way, but it's not all sunshine and rainbows

Solar power will help bring down electricity prices over the next five years, according to a new report. But it’s cheap imports of ‘dirty power’ that will lower them the most