LONDON: UK Chancellor of the Exchequer Alistair Darling yesterday afternoon announced a £20 billion 9430 billion) "fair and responsible" fiscal stimulus package or 1 percent of GDP aimed at helping businesses and the economy weather the worst recession which the country has seen for decades.
The package will be funded in part by an extra £5 billion in efficiency savings and a doubling in government borrowing.
The chancellor told MPs that the recession was precipitated by a global crisis to the jeers and derision of the opposition Conservative MPs. He added that the World Bank and other institutions were confident that the global economy would recover strongly, doubling in size over the next two decades. His main aim was to get consumers spending again and save businesses from going under.
The measures are a motley of tax-breaks, handouts, a freeze on previously-announced tax increases, and a sop to both the Green lobby and motorists. The country would pay back these handouts in better times ahead through a slowdown in government expenditure and the inevitable tax increases. These measures would be announced as the recession recedes and the situation improves.
Countries all over the world, especially President-elect Barack Obama's Economic Transition Team, will be studying Chancellor Darling's pre-budget report (PBR) keenly to see whether they can extract any of the ideas for their own stimulus packages.
Already in the UK a huge political divide has opened between the ruling centrist Labour government of Prime Minister Gordon Brown and the main opposition center-right Conservative Party, which is against any rampant borrowing to stimulate the economy and are more in favor of allowing the recession to take its natural economic course.
Immediately after the chancellor finished his speech, shadow Chancellor George Osborne, to the cheers of his backbenchers, warned that the prime minister "did not fix the roof when the sun was shining" and rubbished the Labour government's record, saying it was "ludicrous" of the prime minister to say he had "abolished boom and bust".
Osborne warned that the chancellor was playing politics with the country's economic future and was locking Britain into a future "tax bombshell" to pay for today's PBR provisions.
The PBR targeted both the working and middle classes and set aside at least £7 billion for helping small and medium-sized businesses weather the effects of the recession. Other headline measures include cutting value-added tax (VAT) from 17.5 percent to 15 percent for 13 months, which would put an estimated £12.5 billion in consumers' pockets; raising the top rate of tax for those earning more than £150,000 per year to 45 percent which will into effect only after the next general election; and raising all National Insurance Contributions by 0.5 percent from 2011. The cut in VAT comes into effect next Monday in time for the Christmas shopping season.
The chancellor, in a jibe to the opposition Conservatives, said it would be "perverse and damaging" to stick to government borrowing rules in the current crisis. As such these rules would be temporarily suspended, but pledged that the government books would be balanced again by 2015/16.
UK national debt as a result of the PBR announcement is set to increase to £78 billion this year and £118 billion next year, before starting to come down.
"If we did nothing we would have a deeper and longer recession that would cost the country more in the long term. In these extraordinary circumstances allowing borrowing to rise is the right choice for the country," Darling told a packed House of Commons.
The chancellor cut UK GDP growth forecasts for the next year from 2.75 percent to between - 0.75 percent and - 1.25 percent, perhaps the largest ever single cut in growth forecast in British budget history, but projected GDP growth to bounce back in 2010 with a positive growth of between1.5 percent to 2 percent.
The UK government's aim is to soften the impact of the recession and a shrinking economy by making more money available in the pockets of ordinary Britons, who would then spend more and thus stimulate consumer confidence and the economy.
As such, this year's increase in the income tax personal allowance of £120 a year for basic rate taxpayers is to be made permanent and increased to £145 in April, helping 22 million such taxpayers - another 500,000 households not just this year but for good.
Speaking earlier at a CBI conference, Brown justified the planned changes by saying: "Extraordinary times require extraordinary action. To fail to act now would not only be a failure of economic policy but a failure of leadership. Doing too little too late would mean more damage and more deterioration."