BROWN’S 2.5% VAT CUT – borrowing to be increased by £150bn

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Chancellor Darling is set to announce a 2.5 per cent cut in Value Added Tax (VAT) from 17.5 per cent to 15 per cent in his pre-Budget report today, as part of an emergency ‘fiscal stimulus’ package.

Taken together with other relief, the package marks the biggest shift in Labour’s economic policy since Blair and Brown came to power in 1997.

Also planned are lifting the tax on empty business properties, tax relief on company dividends paid on profits earned abroad and a twelve-month freeze on Vehicle Excise Duty on older cars.

It also includes extending for another year the £120 rebate for low-paid workers who lost out through the abolition of the 10p tax rate; and increasing the period of grace before lenders repossess homes to three months.

The ‘fiscal stimulus’ package is to be funded by an estimated £150bn government borrowing.

Business Secretary Mandelson told the BBC’s Andrew Marr show yesterday that action was needed to stop a ‘very deep recession’, that ‘we’ve got to enable and help viable businesses survive, and that’s what tomorrow’s package is going to be all about.’

He conceded it may mean higher taxes in the longer term to pay for it.

He added that ‘the CBI and other business leaders have asked for a fiscal stimulus tomorrow that kicks in quickly, that’s temporary and that is sustainable over the medium term.

‘That’s what you’re going to get from the Government tomorrow.’

Prime Minister Brown said earlier : ‘If we do not act now, the downturn will be longer and more severe.’

Darling will today warn that his package will leave Britain with a £150bn debt that will have to be paid back later in the form of higher taxes.

Mandelson conceded any tax cuts would have to be paid for in the long term, saying: ‘Of course they will, if what we are going to do tomorrow is going to be sustainable.’

But he insisted that action was needed now to deliver ‘the sort of stimulus to the economy that will raise consumers’ confidence, that will encourage them to spend, put more money in their hands, therefore raising demand and filling up order books again’.

Liberal Democrat leader Vince Cable told the Andrew Marr Show that ‘the government really does have to exercise effective control over the banks’ that ‘they must get there on the boards, setting the strategy for the banks and making sure that the economy moves forward.’

He was asked: ‘So there should actually be government representatives on the boards of the banks?’

Cable affirmed: ‘Absolutely, and I don’t understand why they walked away from their responsibilities in that respect.’

Asked about the planned 2.5 per cent cut in VAT, Cable said that this was a temporary measure.

He said: ‘There is a danger of any tax cut that it’s not perceived as permanent. That’s why we want a tax cut that is permanent.

‘But that’s why the stimulus to the economy can’t just come through that route.

‘In many ways, something much more important I think has to happen tomorrow is that we’ve got to see significant government investment and the classic area is social housing.’

He added: ‘The government has a massive opportunity here to acquire land at very cheap prices that are going at the moment, building very substantial numbers of social houses for people on waiting lists.

‘It can actually do something proactive.

‘Of course it has to be financed in the short-run from government borrowing, but this is a major way in which the government can actually get the productive economy going forward and we get an asset in the form of housing.’