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Europe

Britain Unveils Stimulus Plan as Recession Looms

The British government has unveiled plans to cut value-added tax as part of a massive fiscal and financial package worth 20 billion pounds ($30 billion) to stimulate the economy in the face of a looming recession.

Britain's Chancellor of the Exchequer Alistair Darling, right, and Prime Minister Gordon Brown

Britain's Chancellor of the Exchequer Alistair Darling, right, says borrowing is the only option

The measures are expected to push government borrowing to 78 billion pounds this financial year and to 118 billion pounds in 2009, Alistair Darling, the chancellor of the Exchequer, told parliament Monday, Nov. 24.

But he defended the Labour government's decision to respond to the impending recession by stimulating growth and increasing national debt to 8 percent of gross domestic product (GDP) next year.

It would be "perverse and damaging" to stick to government borrowing rules at a time when Britain faced "exceptional economic circumstances" as a result of the global downturn, Darling said.

Investors welcomed news of the package, sending the London stock market surging by a record amount. The capital's FTSE 100 index of leading shares leapt 9.84 percent -- the biggest ever daily gain -- to end at 4,152.96 points.

Borrowing the 'only option'

"In these extraordinary circumstances allowing borrowing to rise is the only choice for the country," he said, predicting that the government's books would be balanced again by 2016.

The measures were aimed at tackling the effects of an "unprecedented global crisis," the Chancellor of the Exchequer said. They would make sure that the economic downturn would be "shorter and shallower" than would have been the case otherwise.

"The UK is the world's leading financial center but because of the size of the financial sector, we are likely to be affected more directly by a global financial recession," the finance minister told lawmakers.

A man walks past a Royal Bank of Scotland logo in the entrance hall of the company's offices in central London

Slowing economic conditions have affected most British banks

Darling said the British economy would shrink next year between 0.75 and 1.25 percent, but predicted a bounce back by 2010 with 2 percent growth.

The opposition Conservatives called the government's plans a "tax bombshell" and a betrayal of voters who would be asked to finance the extra spending through tax increases later.

Centerpiece of the package is the temporary cut in value-added tax (VAT) on consumer goods, from 17.5 percent to 15 percent from Dec. 1 to the end of 2009.

The VAT measure, to come into force in time for Christmas, would put 12.5 billion pounds in consumers' pockets, said Darling.

Raft of tax measures

Consumers would also benefit from a postponed planned increase in road tax, an extension of a tax rebate for low earners, a delay in the rise of corporation tax and further funding of various energy saving measures.

However, in what is a complete reversal of previous Labour Party policy, the government announced an increase in the top rate of income tax to 45 percent -- from currently 40 percent -- for people earning more than 150,000 pounds a year.

But the tax hike, estimated to affect some 400,000 earners, would only come into force in 2011, after the next general election, when National Insurance contributions would also go up.

"The government of the day is eventually going to have to restore fiscal rectitude via spending cuts, tax increases or a combination of both," said Philip Shaw, a leading independent economist.

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