VAT cut as Darling unveils SME loans

A 2.5 per cent drop in VAT and a tax hike for big earners were the focal points of a pre-Budget report designed to kickstart the economy.

Chancellor of the Exchequer Alistair Darling delivered his statement on the report, which he claimed was a £20bn fiscal stimulus to the UK economy, during a heated session in the House of Commons yesterday. Having previously claimed he expected Gross Domestic Product to increase by two per cent next year, Darling now claims he anticipates a fall of between 0.75 and 1.25 per cent.

Darling also announced £3bn of capital spending, including housing and road projects, will be brought forward from 2010/11. The afternoon's showpiece announcement, however, was the cut in VAT from 17.5 to 15 per cent, effective from Monday until the end of next year. Darling urged retailers to pass this on to consumers as soon as possible.

The Chancellor also revealed income tax for those earning more than £150,000 would rise from 40 to 45 per cent. Executives could also be hit by a reform in air passenger duty which will see those who travel farthest paying the most. Darling then stressed economic recovery must go hand in hand with the government's environmental commitments.

Darling did offer a helping hand to SMEs with the announcement of a £1bn pot for loans to small businesses. He also unveiled plans to allow small firms to spread tax payments over a timeframe that suits them and introduced a tax relief threshold for empty properties.

Emotions ran high as the report met with vociferous responses from both sides of the House; shadow Chancellor George Osborne claimed it was "all about the political cycle and not the economic cycle”.