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Alistair Darling has announced a £20 billion fiscal stimulus to help the British economy through the global downturn, including an immediate cut in VAT designed to boost consumer confidence in the run-up to Christmas.

That tax cut will be partly paid for down the line by a new top rate of income tax, but the overall package announced by the Chancellor in his annual Pre-Budget Report was accompanied by huge borrowing projections which the Tories said would see national debt double to £1 trillion in a few years. Mr Darling admitted that borrowing would not return to a sustainable level until 2015-16.

Revising his growth forecasts, Mr Darling said that the economy would grow by just 0.75 per cent over 2008, down from a Budget forecast of 2 per cent. Next year, it would contract by between 0.75 per cent and 1.25 per cent.

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But he said that timely action now would help to make the downturn shorter and shallower and leave the economy in better shape when it starts to recover in the second half of next year.

"There is a choice," Mr Darling said. "You can choose to walk away, let the recession take its course, adopt a sink or swim attitude, letting families go to the wall. That is no action plan.

"Or you could, as I have decided, as governments of every shade around the world have, support businesses, support families, by increasing borrowing which will also reduce the impact and length of the recession.

"I will do whatever it takes to support people through these difficult times. That’s why my Pre-Budget Report today represents a substantial fiscal loosening to help the economy now with a £20 billion fiscal stimulus between now and April 2010, around 1 per cent of GDP."

The Chancellor announced that he will borrow an extra £35 billion in the current financial year, 2008-09, lifting planned borrowing to £78 billion from the £43 billion intended in March's Budget.

Over this year and the following four years, he now now plans to borrow £231 billion extra, and a total of £394 billion.

Mr Darling said the cut in VAT from 17.5 to 15 per cent will come into effect next Monday and continue for 13 months. He urged retailers to pass on the cut to shoppers as soon as they could.

He said: "This temporary reduction is the equivalent of the Government giving back some £12.5 billion to consumers to boost the economy. It will make goods and services cheaper and, by encouraging spending, will help stimulate growth."

But it was not all good news for consumers. Mr Darling said he was going to "offset the VAT reduction" by increasing duties on petrol, alcohol and tobacco "by an amount which should keep the overall cost to consumers the same this year".

Mr Darling announced that £3 billion of capital spending on the motorway network, new social housing, renewing schools and energy efficiency measures, will be brought forward from 2010-11 to this year and next.

But workers will face a tax rise in years to come. Mr Darling said that by 2011, when he expects the economy to be recovering strongly, half a per cent will be slapped on all rates of national insurance contributions for employees and employers.

Those earning more than £150,000 will face a new top rate of 45p in the pound, up from the current 40p rate.

Replying for the Tories, the Shadow Chancellor was scathing. George Osborne said that Mr Darling's statement proved that Gordon Brown's claim as Chancellor to have abolished boom and bust "was one of the great deceits".

And he said that Mr Darling had announced the largest amount of borrowing ever undertaken. "A national debt that has accumulated over centuries is going to double over five years: that is the bill for Labour's decade of irresponsibility," Mr Osborne said.

The Shadow Chancellor also mocked Mr Darling's prediction that recovery would start in the second half of 2009 and yet the tax increases needed to pay for the extra borrowing would not kick in until 2011, after the next general election. "This Budget is all about the political cycle and not the economic cycle," he said.

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