(Reuters) - The government is set to announce on Monday it will inject up to 20 billion pounds ($29.68 billion) into the economy in a gamble to stave off a deep recession.
Chancellor Alistair Darling’s package, known as the pre-budget report, is expected to include tax cuts and increased public spending.
His speech to parliament at 3:30 p.m. (1530 GMT) is expected to contain plans for future tax rises to pay for the package.
The economy is on the verge of recession but Prime Minister Gordon Brown argues the downturn can be shorter and less painful if Britain gives a fiscal boost to the economy, particularly if other countries do the same.
David Cameron, leader of the opposition Conservatives, says Britain should not resort to large-scale additional borrowing that would swell the national debt and have to be paid for by higher taxes in future.
Even without a further loosening of the purse strings, Darling will have to tear up his previous borrowing forecast of 43 billion pounds for the 2008-2009 year, as borrowing had already reached 37 billion pounds by October.
Analysts believe the combination of falling tax revenues and higher government spending -- typical in a recession -- mean borrowing is likely to be revised up to about 70 billion pounds this fiscal year and close to 120 billion pounds in 2009-2010.
At the time of the budget in March, the government predicted growth of about 2 percent this year and 2.5 percent in 2009. These forecasts now look wildly optimistic.
The consensus of economists polled by Reuters is for growth of 0.8 percent this year and a contraction of 1.3 percent next year. With the Bank of England also forecasting a painful contraction in 2009, Darling will be forced to lower the government’s forecasts.
Darling has hinted the government will suspend its rule that limits borrowing to 40 percent of gross domestic product. Its second rule, that the government can borrow only to invest over the economic cycle, is also likely to be broken.
These two rules have defined the public finances framework since the Labour government came to power in 1997.
The centrepiece of the plan would be a temporary cut in sales tax paid on many goods, newspapers reported.
They said the tax, known as value added tax or VAT, could go down to 15 percent from 17.5 percent for one or two years.
To persuade markets the government is serious about mending its finances once the economy picks up, Darling is expected to announce plans for deferred tax rises and public spending curbs.
The BBC and Sky News said one of those measures would be a proposal to introduce a new 45-percent income tax rate on high earners if Labour wins the next election, up from the current top rate of 40 percent.
The new tax would come in from 2011 and probably affect people earning more than 150,000 pounds a year, they said.
The rise would be controversial because it would break a long-standing Labour pledge not to raise tax on high earners.
The government has said Monday’s pre-budget report will include measures to support small businesses whose access to bank lending has been restricted by the financial crisis.
Newspapers have reported that Darling is considering tougher laws to force banks to lend to small businesses which could include capping interest rates on loans to small firms.
The Financial Times said the government would underwrite new loans to small firms and was likely to announce measures to help businesses that have lost insurance cover.
The Sunday Times said Darling would scrap plans to increase corporation tax for small companies.
Tax cuts are expected to favour the lower paid because of the government’s belief that they are more likely to spend the money, rather than save it.
Darling trimmed income taxes for 22 million people in May, a concession financed by a 2.7-billion-pound increase in government borrowing. The move was meant to compensate about 5.3 million low-paid people who lost out when the government scrapped a 10-percent income tax band.
Darling is under pressure to extend the help for the low-paid into the next tax year and may opt for increases in tax credits or tax rebates.
Although a cut in the income tax rate is viewed as unlikely, Darling could increase the amount people may earn before paying tax by more than the rate of inflation.
The Sunday Times said Darling would exempt foreign dividends from tax in an effort to allay concerns over proposed changes to taxation of foreign earnings that have led several big companies to shift their tax domicile away of Britain.
WPP, the world’s second-biggest advertising and marketing group, drugmaker Shire and media group United Business Media have announced plans this year to move their tax domicile to Ireland.
In September, the government said it would exempt properties worth less than 175,000 pounds from a home purchase tax known as stamp duty for a year, raising the threshold from 125,000 pounds. Tax experts say Darling could extend the concession, or make it permanent.
Home owners struggling to meet mortgage payments will get three months’ grace before banks begin repossession proceedings, the Sunday Telegraph reported.
Darling will bring forward school and hospital building projects to help the construction industry as well as a programme to make local authority-owned housing more energy efficient, the Times said.
The government says it can save more money than planned through efficiency cuts in the public sector. It had originally aimed for 30 billion pounds in efficiency savings between 2007 and 2010 but now believes more money can be saved from areas such as procurement, asset management and corporate services.
Darling’s number two, Yvette Cooper, said on Thursday the 30-billion target could be beaten.
Darling may extend a temporary freeze on fuel duty. He may also announce additional winter fuel payments for the elderly.
Planned above-inflation rises in vehicle excise duty for older cars will be delayed for at least a year, the Sunday Telegraph reported.
The pre-budget report may include above-inflation tax rises on alcohol and tobacco.