Britain to introduce massive stimulus package

British Prime Minister Gordon Brown will try to kickstart his country's stalling economy on Monday by spending billions of borrowed pounds on tax cuts in a bid to stop a recession turning into a slump.

$38B in tax cuts, extra spending in effort to stimulate ailing economy

British Prime Minister Gordon Brown will try to kickstart his country's stalling economy on Monday by spending billions of borrowed pounds on tax cuts in a bid to stop a recession turning into a slump.

The package, expected to total up to 20 billion pounds ($38 billion), or more than one per cent of gross domestic product, will also include extra public spending but will also include a warning that taxes will rise later to pay for the boost.

An expected rise in income tax for high earners — deferred until after the next election —would be a major policy shift for Brown's Labour government and mark the first time that tax had been raised since 1975.

"Extraordinary times require extraordinary action," Brown told a business conference on Monday.

The package, which chancellor of the exchequer Alistair Darling will unveil to Parliament Monday afternoon, is expected to include a cut in sales tax and help for businesses, low earners and home owners.

The centrepiece of Monday's plan will be a temporary cut in a sales tax, known in Britain as the value-added tax, several newspapers reported.

Those reports suggested the VAT could be reduced to 15 per cent — the lowest level allowed by the European Union — from 17.5 per cent, boosting consumers' spending power before the December holidays. The cut would be reversed after one or two years.

Labour's popularity down

Britain is sliding into recession with house prices slumping, unemployment rising and manufacturing output shrinking.

Although Brown's handling of the financial crisis has lifted his flagging popularity, a poll published on Sunday still showed his Labour Party trailing the opposition Conservatives by 11 percentage points, a wider margin than some other recent surveys.

"They are throwing money at us now to take it back at a later date. That is the real story of this pre-budget report," Conservative Leader David Cameron said. "Never in the history of Britain have so many owed so much."

Brown's chances of winning the next election, due by mid-2010, may depend on the recession being relatively short and shallow, but that is looking increasingly unlikely.

As well as radically increasing his borrowing numbers, Darling will have to slash his economic activity forecasts.

Labour's spending measures could send Britain's budget deficit ballooning to around 120 billion pounds in the next financial year.

Respected economic forecasters, the National Institute of Social and Economic Research, said on Monday Britain's economy would shrink by 1.5 per cent next year and is not expected to start recovering until early 2010.

In March, Darling forecast growth of about two per cent this year and around 2.5 per cent in 2009.

Germany, the Netherlands and Spain have already announced stimulus plans. A European Union economic stimulus package, reportedly worth up to 130 billion euros ($209 billion), is expected to be unveiled on Wednesday.

With files from Reuters