Darling in £12bn VAT Christmas giveaway

ALISTAIR Darling will tomorrow cut the level of VAT in time for Christmas as part of a multi-billion-pound bid to kick-start spending and revive the economy.

Scotland on Sunday can reveal that the Chancellor is preparing to use his annual Pre-Budget Report (PBR) to cut VAT from 17.5p to 15p, reducing the cost of goods and services across Britain.

As the cut can be introduced with immediate effect, the move will give shoppers and retailers a boost ahead of the festive period.

But the annual cost to the Treasury could hit £12bn and cause public borrowing to rocket beyond £115bn next year.

And Conservative leader David Cameron will oppose the measure, arguing the tax cut is a "tax con" which will have to be paid for in massive tax rises within the next year.

In his PBR, Darling will concede that tax cuts are for a limited period only and that they must be paid for through increased taxes or lower Government spending in years to come.

But he will argue that the economy requires an immediate shot in the arm to prevent recession slipping into depression. In a speech tomorrow, Prime Minister Gordon Brown will also warn that "doing too little, too late, would mean more damage, more deterioration".

Taking into account other measures, Darling's multi- billion-pound giveaway is expected to exceed £15bn but will stop well short of the £30bn expected by some in Government.

The Chancellor is expected to announce further, short-term measures to boost spending, including a further freeze on fuel duty. MPs are also putting pressure on him to increase the income tax threshold from its current level of £6,000 in order to take more low income households out of tax altogether.

The Government is also set to create new teams of rapid response units to deal with the expected increase in layoffs being forced upon small and medium-size firms. The teams will go into companies and attempt to find redundant staff new jobs or retrain them.

But it will be the measure to slash VAT to 15% – the lowest allowed under EU law – which will get the most attention. The Chancellor is expected to argue that the move will help lower income families most because the cost of VAT falls more heavily on their shoulders than it does on better-off homes.

Barbara McQuillan, a tax partner at Henderson Loggie Chartered Accountants, said: "A reduction of 2.5% to 15% would be welcome. A temporary reduction in VAT on certain goods and services might stimulate spend and help certain sectors if, for example, VAT was reduced or suspended on home improvement and property conversions. This would no doubt be most welcome in the construction sector."

Darling is believed to have stipulated that the cut in VAT is only for the next few months. Although this week's cut will be met entirely from borrowing, the Chancellor will tell the Commons tomorrow that, in the longer-term, he intends to reduce that deficit.

The cut would have an immediate effect on the High Street. The cost of a BMW 325i retailing at £12,995 would be reduced by £276 under Darling's plans. An I-Pod touch costing £160 would be £3.40 cheaper. A pair of leather boots retailing at £115 would cost £112.50 after a cut.

The move to cut VAT will pile further pressure on the Conservative leadership of David Cameron and George Osborne who have argued that tax cuts now, funded by borrowing, are wrong.

However, yesterday the move was given backing by former Chancellor of the Exchequer Ken Clarke. Clarke said: "If it's possible to afford a fiscal stimulus, I would go for VAT because the only case for a fiscal stimulus is to stimulate spending and consumer demand so the tax on spending is the one to go for. But it should be temporary."

But Phillip Hammond, shadow chief secretary to the Treasury, said: "We are in favour of funded tax cuts. But tax cuts paid for by borrowing today will mean tax hikes and misery in the future for families and businesses. That's why unfunded tax cuts are a tax con, not a tax cut."