Osborne signals U-turn on economy with growth plan

Package to create new jobs in the private sector seen as a shift of emphasis towards 'Plan A+'

George Osborne is drawing up plans for a major growth package to boost the British economy, in what critics will say is a significant shift from his Plan A of austerity and spending cuts.

In what has been described in government circles as Plan A+, cabinet ministers have been told to identify big-ticket infrastructure projects that can be speeded up to jump-start growth.

The move follows President Obama's $450bn (£280bn) plan to create new jobs and cut payroll taxes, and comments on Friday by Christine Lagarde, head of the International Monetary Fund, who gave only qualified support to the UK Government's deficit reduction plan and said that Britain needed to show "readiness" to respond to flatlining growth.

While the British plan will not involve new money, schemes already in the pipeline are to be accelerated, in an attempt to encourage private companies to take on more workers. Projects will include transport upgrades, housebuilding and the expansion of green energy and super-fast broadband.

Some ministers are pressing for the Chancellor to go further and introduce tax cuts for businesses, including cutting VAT on home repairs from 20 per cent to 5 per cent.

This week Nick Clegg, the Deputy Prime Minister, will deliver a speech on the economy, in which he is expected to outline a "plan for growth", coinciding with the publication of unemployment and inflation figures that Downing Street sources are warning "will be bad".

The new plans emerged on the eve of Sir John Vickers's report on banking reform, to be published tomorrow, which will call for a partial ringfencing of banks' risky investment arms from high street retail banking.

The shift in policy will be seen as a further victory for the Liberal Democrat wing of the coalition, after Tory climbdowns on the NHS and free schools. In an interview this year with The Independent on Sunday, Vince Cable, the Business Secretary, set out his proposal for "shifting the emphasis on to growth-enhancing interventions". MPs on the right of the Conservative party have also called for a Plan A+, based largely on tax cuts, though the issue of scrapping the 50p rate for those earning over £150,000 remains politically toxic.

Mr Osborne has been under pressure to act after figures showed that the economy grew by only 0.2 per cent in the three months to June, while unemployment jumped by 38,000 to 2.49 million in same quarter.

The Chancellor has also been urged to introduce tax cuts for low earners, including speeding up a planned raising of the lower threshold of income tax to £10,000 in the new year.

On Friday, appearing alongside Ms Lagarde at Chatham House in London before the G7 summit in Marseilles this weekend, Mr Osborne insisted that his Plan A was on track: "Britain will stick to the deficit plan we've set out. It's the rock of stability on which our recovery is built."

Nevertheless, ministers and government advisers hope President Obama's initiative, unveiled last week, will clear the way for a new growth plan. In his speech on Wednesday, Mr Clegg will say that the Government has a "key role to play in stimulating growth". On Thursday, ministers will use a major conference to warn councils and business leaders in the new Local Enterprise Partnerships that they are at the "front line" of the economic recovery.

One cabinet minister said: "You do what you can to really move along infrastructure investment. There's vast infrastructure needs, transport, energy, broadband, all the rest of it."

A £530m plan to take super-fast broadband to rural areas by 2015 could be brought forward. At the same time, Chris Huhne, the Energy Secretary, is anxious to accelerate his Green Deal to create 100,000 jobs in making Britain's homes more energy efficient. It is seen as a flagship policy to generate demand, which the private sector will meet. "The Green Deal is a good example where you create a market, and government intervenes," a senior cabinet source said.

Officials have been told by Philip Hammond, the Transport Secretary, to draw up plans to upgrade diesel-powered Cross Country Voyager trains to run on electric lines. If feasible, this could mean a £120m contract for the train builder Bombardier, which has a factory in Derby but lost the £1.4bn Thameslink contract to German rival Siemens, putting 1,400 jobs at risk.

However, it is not all plain sailing. The Government's Employment Red Tape Challenge to make it easier for firms to hire and retain staff has become the subject of inter-Whitehall wrangling after it emerged that the Treasury and HM Revenue and Customs – which oversee payroll and tax laws – were excluded from it. Ministers at the Department for Business, Innovation and Skills "hit the roof" when they discovered the exemption.