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Alistair Darling will threaten legislation today to stop banks withdrawing cheap mortgages and credit lines from their hard-pressed customers overnight as he unveils a package of VAT cuts, help for small businesses and green measures designed to shorten Britain's recession.
In a pre-budget report that will draw the battle lines for the next general election, the chancellor will insist that plans to bring forward spending through a 2.5% one-year VAT holiday and to ease the financial pressure on companies will deliver economic recovery in 2010.
The combined impact of a recession, expected by the Treasury to shave at least 1% from national output next year, and today's fiscal stimulus will push government borrowing close to £120bn next year. Gordon Brown said yesterday it was not a gamble, but the Conservative leader, David Cameron said voters faced a "tax bombshell" in future years.
Darling will underline the government's frustration at the way high street banks are intensifying the impact of the credit crunch by summarily withdrawing mortgages and toughening up the terms of overdrafts.
Unless the banks agree to toughen up their code of practice, the government will consult on legislation that would require banks to give their customers fair notice of any changes to their products. "All the risk is falling on the consumer and on the individual business," one Whitehall source said. "It is not easy for them to manage. It is much easier for the banks to manage that risk."
The prime minister said the government had to "persuade and cajole" banks into lending at appropriate prices and resume mortgage lending. "You will see in the pre-budget report and subsequently a number of measures that will actually make that happen more quickly," he said.
He added that the government was prepared to use a mixture of "carrot and stick" in getting banks lending again.
Small businesses will also be helped by Darling's decision to defer the increase in corporation tax from 21p to 22p that was to come into force next April, and by a government-backed lending guarantee scheme. Revenue and Customs will also be instructed to give small firms more time to pay their tax bills in the hope that it will ease cash flow problems.
Government sources said last night that the pre-budget report was likely to inject some £15bn into the economy, about 1% of gross domestic product. The size of the tax cuts and spending increases will be higher because the Treasury will say it has managed to find several billion pounds of cost savings.
The VAT change alone will cost the exchequer around £12.5bn in lost revenue, with the continuation of the compensation for those who lost out from the abolition of the 10p tax band costing £3bn.
Fearful that the financial markets will be alarmed at plans to borrow about 8% of GDP in 2009-10, Darling will explain how he intends to repair the hole in the public finances once the economy starts to recover. The chancellor believes full recovery in the economy will not occur until 2011 but will announce a tightening of fiscal policy from the spring of 2010.
Speaking on BBC1's The Daily Politics show, Brown said: "If you say at the moment that there is nothing that government can do by spending more or investing more at the moment then that is a gospel of despair in the future ... I believe people will say action now is better than no action and more problems later."
Cameron attacked what he called the government's "borrowing binge". Speaking on BBC1's Andrew Marr show, he said. "Maybe £80bn this year, before the recession's even properly started, and possibly over £100bn next year ... I do have a real concern about a government going on a borrowing binge that even they are now admitting is going to lead to much higher taxes later."
- Pre-budget report
- UK banking sector
- Banks and building societies
- Mortgages
- Economic policy
- Credit crunch
- Recession
- Alistair Darling
- Tax and spending
- Tax
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