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Brown borrows big to kickstart British economy

Prime Minister Gordon Brown will try to kickstart the stalling British economy on Monday by spending billions of borrowed pounds on tax cuts in a bid to stop a recession turning into a slump.

The package, expected to total up to Ł20 billion ($30 billion), or more than 1% of gross domestic product, will include extra public spending designed to lift the economy.

Brown's finance minister, Alistair Darling, will announce plans to plug the hole in state finances by raising taxes in future, including a major political shift in the form of a sharp rise in income tax for high earners, media reports say.

“Doing nothing is not an option,” Brown will tell a business conference on Monday. “We need timely action now to prevent permanent damage.”

The stakes are high: Britain is sliding into recession with house prices slumping, unemployment rising and manufacturing output shrinking.

Although Brown's handling of the financial crisis has lifted his flagging popularity, a poll published on Sunday still showed his Labour Party trailing the opposition Conservatives by 11 points, a wider margin than some other recent surveys.

His chances of winning the next election, due by mid-2010 and which Brown has said he does not plan to call next year, may depend on the recession being relatively short and shallow - but that is looking increasingly unlikely.

Respected economic forecasters, the National Institute of Social and Economic Research, said on Monday Britain's economy would shrink by 1.5%/percent next year and is not expected to start recovering until early 2010.

In March, Darling forecast growth of about 2% this year and around 2.5% in 2009.

Labour's spending measures could send Britain's budget deficit ballooning to around Ł120 billion in the next financial year, forcing them to abandon long-standing rules limiting government borrowing.

To persuade markets the government will balance the books once the economy improves, Darling is expected to announce plans for deferred tax rises and public spending curbs.

British media said one measure would be a new 45% income tax rate on high earners if Labour wins the next election, up from the current top rate of 40%.

The move would be controversial because it would break a Labour pledge that formed the backbone of Labour's revival in the 1990s not to raise taxes on high earners.

“Every election we have fought and won, we have said that we very clearly that there will be no increase in the rate of personal income tax - and this time we are not going to say that. We're not going to say it because we are going to increase it,” Labour MP Geoffrey Robinson told BBC Radio.

The centerpiece of Monday's plan will be a temporary cut in value-added tax, several newspapers reported.

They said VAT could be reduced to 15% - the lowest level allowed by the European Union - from 17.5%, boosting consumers' spending power before Christmas. The cut would be reversed after one or two years.

The Sunday Times said Darling would scrap plans to increase corporation tax for small companies and exempt foreign dividends from tax in an effort to allay concerns that have led several big companies to shift their tax domicile to Ireland.

A Treasury spokesman declined to comment on the reports.

Germany, the Netherlands and Spain have already announced stimulus plans. A European Union package, worth up to €130 billion ($163 billion), will be unveiled on Wednesday. (Reuters)