Chancellor under attack as Tories turn spotlight on '20 per cent VAT'

ALISTAIR Darling yesterday faced accusations the government had considered raising VAT to 20 per cent to plug a "black hole" in the economy which the Tories claim will be deepened by his £20 billion emergency Budget.

The Chancellor came under attack after Treasury documents were unearthed showing ministers had a plan to raise VAT to 18.5 per cent in 2011, rather than hold it at the present rate of 17.5 per cent.

A 13-month cut in VAT, taking it to 15 per cent, starts on Monday as part of the £20 billion "fiscal stimulus" to soften the effects of the recession by boosting high street spending.

Mr Darling, who yesterday faced an emergency Commons debate on the contents of Monday's Pre-Budget Report, admitted that he and Gordon Brown, the Prime Minister, had considered a large number of options in relation to just about every aspect of tax and spending".

But an increase in VAT had been rejected in preference to a 0.5 per cent rise in National Insurance rates as this was the "best and fairest way" to boost the Treasury's depleted coffers, he said.

George Osborne, the Tory shadow chancellor, warned that Labour was turning the UK into a "complete basket case of an economy" with debt set to double to £1 trillion. He said the government's "scorched earth policy" was leading the country to ruin.

Former Tory Chancellor Kenneth Clarke was even bleaker, warning MPs: "We are probably facing the longest and deepest recession in this country in my lifetime."

During the debate, Mr Darling was embarrassed when he was told that Northern Rock – which was nationalised a year ago – had raised the cost of new mortgages – appearing to make a mockery of state control. The Chancellor said the bank was reducing the number of people it was lending to "to survive in the long term".

The move came as Tesco, John Lewis and Sainsbury's announced that they would reduce prices from tomorrow rather than waiting until Monday to implement the VAT cut.

Asda announced pre-Christmas reductions on thousands of products, including 17.5 per cent off TVs and DVDs.

Meanwhile, the European Commission proposed a £170 billion rescue plan, similar to the Chancellor's, which would inject extra spending across the European Union, assuming the 27 member states agreed.

Earlier, at Prime Minister's Questions, David Cameron and Mr Brown clashed angrily, with the Tory leader warning of a "VAT bombshell". Mr Cameron threatened to use the Freedom of Information Act to discover if there had been plans to raise VAT above 18.5 per cent by 2010.

Mr Brown replied that previous Tory VAT rises during recessions, from 8 to 15 per cent in the 1980s, and 15 to 17.5 per cent in the 1990s, had "hurt" families.

The Prime Minister said Mr Cameron was "no longer credible" by denying that money needed to be pumped into the economy. Mr Cameron's preference is for further cuts in bank interest rates and freezes in council tax.

Peter Mandelson, the Business Secretary, last night denied that the new 45 per cent income tax band for people earning more than £150,000 and redistribution of wealth to those on lower incomes from those earning above £40,000 marked the "end of New Labour".

In a speech to the Institute of Directors, he said: "New Labour is about more than just the top tax rate. It is, above all, about maintaining stability in our economy to give business the confidence and predictability to invest."