A 2.5 per cent cut in VAT to be announced today as the centrepiece of the Pre-Budget Report will be in place for just over a year, The Times learnt last night.

The tax relief will be temporary, with the rate reverting back to 17.5 per cent in the new year of 2010 as the Chancellor, Alistair Darling, starts to claw back the cash.

It will be the most eye-catching among a series of tax measures to be outlined today that will amount to a “fiscal stimulus” of about £16 billion. It will be paid for by record borrowing, which will soar to £120 billion, or about 8 per cent of GDP, next year.

That will be a higher proportion than at the peak of the last recession in the early 1990s and even higher than the massive debts run up by the last Labour Government in the mid1970s.

The Chancellor will present today’s “recession package” as an attempt to ease the worries of mortgage-holders, workers who fear unemployment and small businesses struggling to raise cash.

Plans for a big shake-up of vehicle excise duty, which would have included large penalties for users of high-emission vehicles, are to be delayed for a year. When finally introduced, the increases will be lower than proposed originally, it is understood.

The VAT cut is aimed at boosting a flagging retail sector during the run-up to Christmas and it will also give a £15 million windfall to charities. Mr Darling plans to extend the small firms guarantee scheme, under which the Government guarantees 75 per cent of the risk of bank loans, and a planned rise in corporation tax from 21p to 22p for small businesses is to be delayed. Revenue & Customs is to be told to give small companies extra time to pay their national insurance, VAT and corporation tax bills if they have cash-flow difficulties.

Mr Darling will also spend £300 million trying to keep multinational businesses in Britain. He is expected to abolish tax on the foreign dividends they receive from their overseas subidiaries – an exemption big business has been seeking for 18 months.

Over the past 12 months, six multinationals, including Shire Pharmaceuticals, the media group WPP, the property company Regus and the investment firm Henderson Group, have moved headquarters out of Britain to save tax. Dozens more are talking to their accountants about such a move. Tax on foreign dividends was cited by Regus and the Henderson group as contributing to their decisions to relocate to Luxembourg and the Irish Republic.

Another expensive item in Mr Darling’s announcements will be a decision to extend for a further year the £2.7 billion package brought in in May to deal with the row over the abolition of the 10p rate of tax. At the time he raised by £600 the rate at which the basic rate applied, giving 22 million families an extra £120 in their pay packets. That would have expired on April 1 but is to be carried through 2009, helping basic-rate taxpayers.

Mr Darling will set out plans to keep the hard-pressed construction industry moving by advancing projects to build schools and hospitals, as well as a big programme to make council homes more energy efficient. With borrowing set to hit £65 billion this year and £120 billion next, he knows that he has to set out a credible path for restoring the health of the public finances.

As The Times reported on Saturday, the Chancellor will also unveil measures to discourage banks from repossessing homes when mortgage-holders hit trouble. They are to be given three months’ grace before proceedings start against them and a scheme allowing people to sell parts of their homes to councils to reduce their costs will be extended.

Today’s figures will show the £120 billion peak in borrowing reducing in the year 2010-11. The reversion to a 17.5 per cent VAT rate will be meant as a signal of future intentions. Ministers also claim to have identified an extra £5 billion a year in Whitehall efficiency savings that will be used to cut borrowing from that year, rather than be spent on frontline services.

There is also speculation that Government assets such as the Met Office, Ordnance Survey and Forestry Commission could be sold off to reduce debts. Mr Brown’s claim yesterday that there was no “hidden manifesto” and that “everything is above board” will be put to the test today.

The Chancellor’s statement will coincide with a speech by the Prime Minister to the CBI. In it, he will say that he is trying to prevent a repetition of mistakes made in previous down-turns. He will say: “We have seen in previous recessions how a failure to take action at the start of the down-turn has increased both the length and depth of the recession.

“That was the mistake made in the recessions of the 1980s and early 1990s. To fail to act now would be not only a failure of economic policy, but a failure of leadership.”

Mr Brown will add that the Government has a duty to set out what it will do later. “By showing we will take the necessary decisions in the medium term to guarantee stability, we can act today in a strong and decisive way.”

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