British government cuts VAT in 20 billion-pound package

Business Materials 24 November 2008 21:37 (UTC +04:00)

The British government Monday unveiled plans to cut Value Added Tax (VAT) as part of a massive fiscal and financial package of 20 billion pounds (30 billion dollars) to stimulate the economy in the face of a looming recession, dpa reported.

The measures are expected to push government borrowing to 78 billion pounds this financial year and to 118 billion pounds in 2009, Alistair Darling, the Chancellor of the Exchequer, told parliament.

But he defended the Labour government's decision to respond to the impending recession by stimulating growth and increasing national debt to 8 per cent of the Gross Domestic Product (GdP) next year.

It would be "perverse and damaging" to stick to government borrowing rules at a time when Britain faced "exceptional economic circumstances" as a result of the global downturn, said Darling.

"In these extraordinary circumstances allowing borrowing to rise is the only choice for the country," he said, predicting that the government books would be balanced again by 2015/2016.

The measures were aimed at tackling the effects of an "unprecedented global crisis," the Chancellor of the Exchequer said. They would make sure that the economic downturn would be "shorter and shallower" than would have been the case otherwise.

Darling slashed growth forecasts for next year to between minus 0.75 and minus 1.25 per cent, but said the economy would bounce back with up to 2 per cent growth in 2010.

The opposition Conservatives called the government's plans a "tax bombshell" and a betrayal of voters who would be asked to finance the extra spending through tax rises later.

Centrepiece of the package is the temporary cut in VAT on consumer goods, from 17.5 per cent to 15 per cent, from December 1 to the of 2009.

The VAT measure, to come into force in time for Christmas, would put 12.5 billion pounds in consumers' pockets, said Darling.

Consumers would also benefit from a postponed planned increase in road tax, an extension of a tax rebate for low earners, a delay in the rise of corporation tax and further funding of various energy saving measures.

However, in what is a complete reversal of previous Labour Party policy, the government announced an increase in the top rate of income tax to 45 per cent - from currently 40 per cent - for people earning more than 150,000 pounds a year.

But the tax hike, estimated to affect some 400,000 earners, would only come into force in 2011, after the next general election, when National Insurance contributions would also go up.

"The government of the day is eventually going to have to restore fiscal rectitude via spending cuts, tax increases or a combination of both," said Philip Shaw, a leading independent economist.