LONDON (Reuters) - The government on Tuesday raised the basic income tax free allowance for this fiscal year at a cost of 2.7 billion pounds as it tried to end a furore over the abolition of a tax rate that helped low earners.
The changes will all be paid through higher borrowing at a time when the public finances are already very tight and the government plans to issue a record amount of gilts this year.
The move, announced by Chancellor Alistair Darling in an emergency statement to parliament, comes as the government's popularity has slumped following voter anger over higher taxes, the rising cost of living and falling house prices.
The government had last month signalled it would make changes to help the low-paid after a revolt by nearly 50 Labour MPs over the scrapping of a 10 percent tax rate, a measure estimated to have made 5.3 million people worse off.
Anger over the issue was widely blamed for Labour's disastrous showing in local elections earlier this month, even though the scrapping of the 10 percent tax rate band was accompanied by a cut in the basic rate of tax to 20 percent from 22 percent.
"At a cost of 2.7 billion pounds, I will increase the individual personal tax allowance by 600 pounds to 6,035 pounds for this financial year, benefiting all basic rate taxpayers under 65," Darling said in parliament.
"This will mean that 22 million people on low and middle incomes will gain an additional 120 pounds this year."
The tax changes will be back-dated to the start of the fiscal year and come into force in September. That means basic rate taxpayers will get an extra 60 pounds in September and 10 pounds a month thereafter.
The changes will all be paid through higher borrowing.
"Mr Darling might argue that other factors like high oil prices will have an offsetting downward effect on borrowing and debt," said Jonathan Loynes, chief European economist at Capital Economics.
"But if the economy slows as sharply as we expect, this will all be irrelevant -- borrowing will rise much more sharply and the fiscal rules will be comprehensively broken."