Brown goes for broke to beat the slump

Alistair Darling: announcing an increase in child benefit and a new higher income tax rate

GORDON BROWN went for broke today by gambling a fortune of borrowed money to beat the slump.

In the most dramatic mini-budget for years, Chancellor Alistair Darling was having to rip up his previous forecasts for the economy.

He will give cash to families and pensioners in the New Year with one hand. But with the other, Mr Darling will dig into people's pockets after the next election to claw some of it back.

The Chancellor said his aim was a "comprehensive plan" to shorten the recession, adding: "I won't play down the difficult times we're facing. But I can promise that I will do everything I can to help people get through them fairly by providing support now."

In key announcements expected this afternoon:

●Borrowing soars to £70billion this year and £120 billion next year - the equivalent of every family getting £10,000 deeper into debt.

●Child benefit goes up almost immediately by over five per cent to £20 for the first child.

●Those on £150,000-plus will be hit by income tax of 45p in the pound after the next election.

●VAT down to 15p to put £11billion into the economy.

Higher child benefit is being rushed out for millions of families — while the wealthy face a new 45p top rate of tax.

The boost for families and the sting for high earners are at the heart of Mr Darling's "spend now, pay later" mini-budget.

Child benefit, paid to 25 million, will go up by over five per cent to around £20 a week for the first child, up £1.20, and £13.20 a week for younger children, up 65p.

The rise would not normally be paid until April, but it is being brought forward to stimulate spending and should reach families in a few weeks. Pensioners will also get an early spending boost, ahead of their regular annual increase.

An immediate cut in VAT from 17.5 per cent to 15 per cent will be the flagship measure to get families spending and keep the tills jingling over Christmas. VAT will stay down for two Christmases in a row, until 2010, the likely year of the general election.

There were indications that VAT may then rise higher than its current level as part of a painful post-election tax blitz to reduce the borrowing requirement, possibly hitting 20 per cent for the first time.

High earners were put on notice that they will be targeted with a new top rate of income tax of 45p in the pound, hitting some 400,000 earning more than £150,000 a year.

In a sign of how little sympathy there is for big earners in the wake of the banking disaster, the Conservatives did not dare immediately attack the idea, knowing they would be challenged to say what other tax they would increase instead.

It will be largely symbolic, raising an estimated £2 billion from 2011 onwards — a drop in the ocean of debt that the Government will need to pay off. But some critics called it the "end of New Labour" because the party famously pledged in its 1997, 2001 and 2005 manifestoes not to change the current 40p top rate, which applies to those earning more than £39,825.

Left-wing Labour MP, John McDonnell, said the 45 per cent rate should be imposed immediately. "It is long overdue and delaying until after the next election is pointless," he said.

Robert Chote, director of the Institute of Fiscal Studies, said: "You are not going to raise an enormous amount of revenue from this."

The fiscal stimulus will inject about £4 billion into the economy in the current financial year and about £15 billion next year. A £2.7 billion tax cut brought in to compensate losers from the abolition of the 10p rate will be carried on for a second year. That is worth some £120 to each basic rate taxpayer.

Hopes were falling among Labour MPs for the extra £1 billion demanded by 10p tax rebels to fully compensate losers who fell through the cracks.
Several billion pounds worth of spending projects originally planned for 2010 will be brought forward to next year to help the economy.

They include hundreds of school and hospital refurbishments, new railway carriages, and minor road improvements. A project to install better insulation in council homes and other social housing will create extra jobs.

The 2012 Olympics is expected to support thousands of construction jobs to help bridge the slump in London.

A package of measures will be aimed at helping small firms. A special loan guarantee scheme will see the Government underwrite 75 per cent of the risk when banks lend to small firms. A 1p rise in the small companies rate of corporation tax planned for April will be delayed at least a year. Revenue and Customs has been ordered to give small firms extra time to pay their tax bills if they seek help. To stem an exodus of firms, tax relief will be given on dividends paid on earnings overseas.

For homeowners, Mr Darling will say he has negotiated a pledge from the banks to give three months grace to people falling behind with mortgages. He told the Standard: "We are being hit by the global shocks that have shaken the world economy. I know many people are worried about their jobs and businesses and how they will pay their bills in the period ahead. So I will set out a comprehensive plan that will support the economy as the global downturn takes hold so we can get through it quicker and stronger, and make sure that we build on a foundation of stability for the future."

The Conservatives said the real story was that taxes would shoot up after the next election.
Revised forecasts will confirm the economy is entering recession and will shrink by more than one per cent next year, though it should start growing again in 2010 and strongly in 2011.

Borrowing, which was supposed to hit a high of £43 billion in the current year, is now likely to reach £70 billion and rise to £120 billion next year. A freefall in tax revenues from the crunch-hit City and the collapse of the property market hitting stamp duty has torn previous Treasury calculations to shreds. Mr Darling was making it clear that his largesse will be short-lived. His Pre-Budget Report was expected to contain a detailed timetable for reducing borrowing from 2011 onwards through tax increased and efficiency savings.

Treasury Minister Yvette Cooper was publishing plans to show how £5 billion can be lopped off Whitehall costs on top of some £30 billion of savings already promised. A new study will be launched to identify state-owned assets that could be sold off, possibly including the Met Office, Ordnance Survey and Forestry Commission land.

In a speech to the CBI, Gordon Brown said previous recessions lasted longer because governments had not taken similar action. "To fail to act now would be not only a failure of economic policy but a failure of leadership," he said.

Create a FREE account to continue reading

eros

Registration is a free and easy way to support our journalism.

Join our community where you can: comment on stories; sign up to newsletters; enter competitions and access content on our app.

Your email address

Must be at least 6 characters, include an upper and lower case character and a number

You must be at least 18 years old to create an account

* Required fields

Already have an account? SIGN IN

By clicking Create Account you confirm that your data has been entered correctly and you have read and agree to our Terms of use , Cookie policy and Privacy policy .

This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.

Thank you for registering

Please refresh the page or navigate to another page on the site to be automatically logged in