Alistair Darling will make a high-risk bid to lead Britain out of recession tomorrow, when he is expected to cut VAT and entice the British people to go on a pre-Christmas spending spree.
The move by the Chancellor and Gordon Brown won the support last night of Charles Clarke, one of the Prime Minister's most high-profile critics, a sign that the economic crisis is at last uniting Labour and focusing minds on the battle against the Tories. With high-street stores slashing prices to attract customers, Darling will offer help with his pre-Christmas price cut in an attempt to limit the collateral damage from the global financial crisis.
The cut is expected to see the rate drop from its current level of 17.5 per cent for at least a year - and possibly for as long as two years.
Last night, as Darling put the finishing touches to the most important financial statement of Labour's 11 years in government, there was speculation that he might slash the rate to 15 per cent, a move that would cost the government about £12.5bn a year.
Such a move, certain to be interpreted as evidence that Brown is preparing for a possible election next year, is seen by the Prime Minister as essential to help the economy ride out the severest economic downturn for generations.
Darling is also expected to announce an extension of the £2.7bn giveaway announced in the summer to buy off Labour rebels opposed to the abolition of the 10p income tax rate. The original rebate, worth £120 a year to basic rate taxpayers, was due to come to an end next April, but the Chancellor is likely to carry it over for at least another year. There could also be wider changes in personal tax allowances to take many low earners out of paying tax at all, as well as plans to speed up infrastructure projects to help salvage jobs in construction. In an interview with the Sunday Mirror, Darling today promises help for 'every household' so people can 'get through the difficult period'. He also promises support for householders with mortgages and those facing redundancy. 'Worried mortgage holders will get help and I shall do what I can to help those who lose their jobs.'
The public sector, he says, will be asked to spend less. 'In these difficult times the public sector will, like the rest of the country, be tightening its belt.'
There was also speculation that Darling could help motorists by postponing plans to increase vehicle excise duty on the most polluting cars.
With the financial markets nervously waiting to see how Brown and Darling intend to pay for the measures, the Prime Minister received a significant boost last night when Clarke, a former Home Secretary, finally buried the hatchet and lavished praise on his former political enemy over his handling of the economic crisis.
Ending one of the bitterest feuds at the top of the Labour party, and in a sign of how it is now united behind its leader, Clarke, who only in September called for Brown to shape up or quit, told The Observer that the Prime Minister had shown 'genuine economic and political leadership at a time when it was both desperately needed and difficult to do'. He said: 'It's been a real surprise to me but Gordon's economic self-confidence has made him more decisive on the political front.' The PM had listened to his critics and had 'earned the right to support'.
'I think that, since the Labour party conference, he has done really well in meeting the challenges of the world financial and economic crisis,' said Clarke. As a result, he said he felt Brown could lead Labour to a fourth consecutive general election victory.
'Winning the election, particularly in the marginal seats in the south east, remains a really tough call, but Labour is obviously back in the race and can do it.'
City economists said a VAT cut was 'psychologically attractive', as it would encourage people to spend when times were hard and could easily be withdrawn later.
The government's deficit will balloon to way above £100bn next year, but the Treasury hopes to reassure the City about the long-term health of the government's finances by announcing detailed plans to increase taxes and squeeze public spending, once the recession is over.
Britain's approach of plunging deeper into the red to pay for a short-term economic support package was echoed in the United States, when President-elect Barack Obama promised to save 2.5 million jobs with a two-year stimulus plan.
'There are no quick nor easy fixes for this crisis, which has been many years in the making, and it's likely to get worse before it gets better,' said Obama. 'But 20 January is our chance to begin anew, with a new direction, new ideas and new reforms that will create jobs and fuel long-term economic growth.'
In a speech to the CBI annual conference tomorrow, Brown will defend his own 'fiscal stimulus' plan, insisting that a 'new approach is now needed if we are to get through this unprecedented global financial recession with the least damage to Britain's long-term economic prospects'.
This weekend, the Conservative party launches a nationwide campaign aimed at highlighting its view that Brown's '£100bn borrowing binge' will mean higher taxes in the long run. Poster vans warning of a 'tax bombshell' - the same phrase the Tories successfully deployed against Labour in the 1992 general election campaign - are being used in London and in busy shopping areas across the country.
George Osborne, the shadow Chancellor, last night accused the Prime Minister of conning the electorate with tax cuts that would have to be paid back. 'Only the Tories will deliver lower taxes that last,' he said.