ALISTAIR DARLING will announce tomorrow he has bowed to the threat of businesses quitting Britain by saying he will introduce a tax exemption on foreign dividends.

He will also announce a package of measures for small firms, including a deferral of planned increases in their corporation-tax rate.

The move on foreign dividends, for which businesses have campaigned hard, was rejected last year by Treasury ministers, who warned that the cost of such an exemption would run into hundreds of millions of pounds.

But the chancellor’s move, to be unveiled in his prebudget report, underlines the government’s determination to present its fiscal plan as business-friendly and to avoid a haemorrhaging of tax revenues as a result of companies moving abroad.

In recent months several high-profile companies have announced that they are moving their headquarters to other countries, including WPP, Shire, United Business Media, Charter, Regus and Henderson.

Darling’s advisers hope the exemption to be announced tomorrow will stem the flow.

It will be part of a package that will also feature extensive help for small businesses, focused on their cash-flow and financing problems.

The centrepiece of this help will be an expansion of the existing small-firms’ loan guarantee scheme, access to European Investment Bank funding and an investigation into the scale of the problem the sector is facing.

Officials played down suggestions the chancellor would announce plans to order banks to lend to small firms, or that the government could lend directly to businesses. But they made it clear the aim was to ease the pressures on the sector.

The measures will be part of a package intended to ensure that the recession is short-lived, built around tax cuts for lower-income earners, a bringing forward of existing capital-spending plans and other steps.

Darling will announce that government borrowing will rise to more than £100 billion as a result of the recession and tomorrow’s giveaway.

He will also announce a medium-term plan to bring the public finances back to health.

This will include efficiency savings of £5 billion a year and rising, starting in 2010, a sharp reduction in planned growth in public spending from existing plans, which assume just under 2% a year growth over the next few years. The chancellor will also announce medium-term tax hikes, partly through a reversal of some of the temporary measures that will be announced tomorrow.

The government’s fiscal boost will be welcomed by business organisations. The Engineering Employers’ Federation, in a report today, calls for a £30 billion boost to the economy, including temporary 2p in the pound cuts in Vat, the basic rate of income tax and the small-companies’ corporation-tax rate. It also wants a 3p in the pound reduction in the main rate of corporation tax, higher investment allowances and additional, targeted public spending.

But economists will put the individual tax measures announced by Darling under close scrutiny.

The Centre for Economics and Business Research, in a report today, warns that a big increase in tax credits, favoured by Gordon Brown, will have the effect of increasing the number of people in the so-called poverty trap.

A £5 billion increase in tax credits would raise the number of people facing a marginal tax rate of 60% or more by 820,000, it said.

The Treasury, which in the March budget predicted that the economy would grow by between 2.25% and 2.75% next year, is now set to forecast outright recession for the first time since the early 1990s.

Following the Bank of England’s gloomy forecast earlier this month, Darling is set to say that the economy will shrink by more than 1% next year. But he is also expected to say growth will return relatively quickly, partly on the back of the fiscal stimulus unveiled tomorrow.

Analysts expect further interest-rate cuts by the Bank of England. A survey of analysts by Ideaglobal. com, the financial-research company, predicts that the Bank’s monetary policy committee will cut its rate from 3% to 2.5% next month.

Big Moves: Shire Pharmaceuticals - Ireland; WPP - Ireland; United Business Media - Ireland; Regus - Luxembourg; Charter - Ireland; Henderson Group - Ireland

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