Darlings Budget cuts VAT to 15%

Chancellor Alistair Darling is cutting VAT from 17.5% to 15% until the end of next year, but increasing duties on alcohol, tobacco and petrol so they remain at the price they are now. Darling, who outlined the measures in his pre-Budget report, says the move will put £12.5bn into consumers’ pockets.

The cut will come into force on December 1, remaining in place until the end of December 2009, and sees VAT at its lowest level for nearly 20 years. The proposalS are understood to have been met with a luke warm reaction from retailers, suggesting that the cut will make only a marginal difference, and that customers will struggle to work out its effect on store prices.

The high street has already seen unprecedented discounts on goods and services in the run-up to Christmas, with retailers such as Marks & Spencer holding a one-day 20% off event, and Debenhams offering up to 25% off everything over three days last week in a bid to attract customers. Other chains are holding mid-season sales.

Other measures announced today (November 24) include raising the top rate of tax to 45% from April 2011, and all National Insurance contributions increasing by 0.5% at the same time. There will be a review of the financial compensation arrangements, which do not cover UK residents who save money in banks based in the Isle of Man and the Channel Islands, while energy regulator Ofgem has been tasked with monitoring changes in energy price. It will publish quarterly reports on the link between wholesale and retail prices.

Darling says the government will inject an extra £20bn into the economy, or 1% of GDP, partly funded by an extra £5bn in efficiency savings. Government borrowing will more than double to £78bn this year and £118bn next year, before starting to come down.

The chancellor says the moves aim to soften the impact of a recession with the UK’s economy set to shrink next year. Speaking earlier at a CBI conference, Prime Minister Gordon Brown justified the planned changes by saying: “Extraordinary times require extraordinary action.”

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