Government to borrow to revive economy

By Matt Falloon and Mike Peacock

LONDON (Reuters) - The government will spend billions of borrowed pounds to fund tax cuts and spending in the hope of preventing a recession spiralling into a slump but warned on Monday taxes would have to rise later to pay for the boost.

Chancellor Alistair Darling told parliament he would cut sales tax and extend help for small businesses, low earners and households in a package worth some 20 billion pounds -- over one percent of gross domestic product.

But he said tax cuts now would mean future rises, including an increase in income tax for high earners, and a surprise increase in payroll tax on employers and workers for all but the lowest earners -- deferred until after the next election.

"These are extraordinary, challenging times for the global economy. And they are having an impact on businesses and families right across the world," Darling said.

The Conservative Party called the plan, which it said would push national debt towards one trillion pounds, a "borrowing binge."

The stakes for Labour are high: Britain is sliding into recession, house prices are tumbling, unemployment rising and Labour lags the Conservatives in opinion polls.

Prime Minister Gordon Brown's chances of winning the next election, due by mid-2010, may depend on a short, shallow recession -- but a limited downturn is looking unlikely: the Treasury slashed its growth forecasts on Monday.

"The choice at the next election could not be clearer -- a record borrowing binge and a lifetime of tax rises under Labour or fiscal sanity and lower taxes that last under the Conservatives," Conservative spokesman George Osborne said.