Brown to Cut Taxes, Boost Borrowing to Counter U.K. Recession

By Gonzalo Vina

Nov. 24 (Bloomberg) -- Prime Minister Gordon Brown will cut taxes and increase spending in a stimulus package that economists expect to total more than 15 billion pounds ($22 billion) as Britain slides into its first recession in 17 years.

“We have seen in previous recessions how a failure to take action at the start of the downturn has increased both the length and depth of the recession,” Brown told business leaders in London today. “A boost to the economy to sustain growth will help to keep businesses open and protect people’s jobs and homes.”

Brown’s stimulus plan mirrors efforts by counterparts in the U.S., Europe and Asia to cushion the worst global slump in three decades. Economists, including George Johns at Barclays Capital, estimate the U.K. package may be worth about 1 percent of gross domestic product, or 15 billion pounds.

The costliest part of the plan may be a cut in the 17.5 percent value-added tax, a sales levy, which accounting firms and economists say Brown may reduce by as much as 12 billion pounds to spur consumer spending. Government officials yesterday called newspaper reports of the reduction “speculation.”

Brown also will propose measures to contain the deficit, including a tax on the highest earners and asset sales.

Brown will impose a new 45 percent income-tax rate on those making more than 150,000 pounds a year, said a person familiar with his plans. The highest rate is now 40 percent and all brackets above that ceiling were abolished in 1988.

Pre-Budget Measures

Chancellor of the Exchequer Alistair Darling will detail the so-called pre-budget report in Parliament today at 3:30 p.m. in London. Other components may include: delaying a planned tax increase on small companies and giving them a grace period to pay previous tax bills, a person with knowledge of the plans said. The government will also defer a doubling in annual taxes on drivers of the most-polluting cars.

He will also exempt foreign companies’ taxes on dividend payments, another person with knowledge of the matter said.

“A temporary fiscal stimulus is just that -- temporary,” Brown said. Darling’s statement today will also be about “showing what we will do later to ensure stability,” fund- raising measures that will include “asset sales over the medium term that will help bring government borrowing down,” Brown said.

The Confederation of British Industry, the nation’s biggest business lobby group, urged 13 billion pounds of corporate-tax cuts. A survey by Ipsos-Mori Ltd. of the CBI’s membership in October and November found 78 percent expect business conditions to worsen in 2009.

‘Exceptional Circumstances’

“In these exceptional circumstances, a shot in the arm is required,” CBI Director-General Richard Lambert said in a Bloomberg Television interview ahead of its annual conference today in London. “All our proposals are designed to support and sustain jobs.”

The National Institute for Economic and Social Research has forecast the U.K. economy won’t recover until 2010 after shrinking by 1.5 percent next year, the biggest contraction since 1980. The London-based group sees the unemployment rate climbing from an average of 5.75 percent this year to as high as 7.5 percent by 2011, the highest since 1997.

The slump is squeezing government finances. The budget deficit was 37 billion pounds for the first seven months of the fiscal year, the most since records began in 1993 and close to the government’s full-year forecast of 42.5 billion pounds.

Debt Sales

That’s causing borrowing to surge. The U.K. may sell a record amount of gilts next year, according to a Bloomberg survey. The government will issue 135.4 billion pounds of bonds in the next fiscal year, according to the median forecast by 10 banks that deal directly with the Treasury. That’s more than double the amount sold last year and up from the 80 billion pounds the government estimated in March.

Brown said the government has no choice but to run up higher deficits and has attacked Conservative leader David Cameron, who opposes spending above what has been budgeted.

“To fail to act now would be not only a failure of economic policy but a failure of leadership,” Brown said. “Doing too little too late would mean more damage, more deterioration -- a weaker economy, lower growth, eventually greater fiscal problems.”

That approach has resonated with voters who, according to opinion polls, have swung back to the Labour Party in recent weeks. Cameron said higher borrowing now meant higher taxes in the future.

‘Mind-Boggling Figure’

“The real story of this PBR will be our enormous deficit,” Cameron told the CBI in a speech replying to Brown’s. “The gap between the taxes that come in and the spending that goes out will be 80 billion pounds. That’s a mind-boggling figure. Gordon Brown will have borrowed more than all previous governments combined.”

Darling will delay for a year a 1 point increase in the 21 percent tax on small companies, which was due to take effect in April 2009, a person familiar with the matter said.

The chancellor will also outline a plan to give the nation’s 4.7 million small companies more time to settle tax and National Insurance bills with the government, the person said.

The pre-budget report will also exempt foreign dividends from taxes, heeding companies’ complaints. WPP Group Plc, the world’s second-biggest advertising company, in September joined United Business Media Plc and drugmaker Shire Plc in saying they would move their tax homes to Ireland to reduce payments. The measure will save companies 300 million pounds a year, a person with knowledge of the plans said.

Treasury officials yesterday wouldn’t say whether Darling would make permanent an increase in the tax-free allowance for 22 million of the lowest wage-earners, introduced in May to stave off a rebellion from members of Brown’s Labour Party.

That U-turn cost 2.7 billion pounds and Darling said he would spell out plans to help poor workers in today’s report. The chancellor said he would borrow to finance the move.

To contact the reporters on this story: Gonzalo Vina in London at gvina@bloomberg.net;