Government cuts income taxes

By Sumeet Desai and David Clarke

LONDON (Reuters) - The government trimmed income taxes for 22 million people on Tuesday, as soaring food and fuel bills sent inflation rocketing and dented hopes for more interest rate cuts soon.

Higher household bills are creating a headache for increasingly unpopular Prime Minister Gordon Brown and the tax handout came after Labour came third in this month's local elections -- its worst post-war performance on record.

"This family tax cut provides support this year for those on middle incomes at a time where they face increased bills," Chancellor Alistair Darling told parliament as he unveiled the surprise tax cuts.

Ordinary tax payers will get an extra 120 pounds this year and Darling said it would be paid for by a 2.7 billion pound increase in government borrowing, putting further pressure on already tight public finances.

The move was meant to compensate some 5.3 million low-paid people who lost out when the government scrapped a 10 percent income tax band, but went beyond in a dramatic push to woo the voters Labour needs to win the next election due by May 2010.

It was also designed to avoid a humiliating defeat in a parliamentary vote on the budget as Labour rebels made common cause with legislators from other parties on the compensation issue.

This would have compounded Brown's problems ahead of a key parliamentary by-election next week which polls suggest could result in a gain for the resurgent Conservatives.

The 10 percent tax row, together with concerns over rising food and energy bills and falling house prices, was blamed for the Labour local election rout.