Chancellor Alistair Darling this afternoon unveiled a £20 billion package of tax cuts designed to breathe fresh life into the struggling British economy.

VAT, income tax and National Insurance structures are all due to change.

The key announcements of the pre-budget report were:

• Cutting the rate of VAT from 17.5 per cent to 15 per cent for 13 months, starting on December 1
• VAT reduction on tobacco, alcohol and petrol to be offset by increasing price of these products by an amount which should keep the overall cost unchanged
• Controversial ‘green’ car tax scheme delayed until 2010 – car tax will only increase by maximum of £5 next year
• Basic state pension to rise to £95.25, and pension credit to rise above inflation
• Extra one-off payment of £60 for every pensioner in January
• Bringing forward £3 billion in capital spending to be spread across schools, social housing, and transport
• £15 million funding for debt advice to people, regardless of their circumstances
• Introduction of a new 45 per cent income tax bracket for people earning £150,000 and above
• Reducing tax exemptions on people earning between £100,000 and £150,000
• Increasing the rate of National Insurance contributions by 0.5 per cent
• Temporary compensation to help 10p tax rate payers to be made permanent
• £100 million extra for home insulation to help with energy bills

Mr Darling said the UK’s borrowing mountain was expected to rise from £78 billion in the current financial year to £118 billion in the year 2010. He said debts would not start to come down until 2015.

He said: “If we did nothing we would have a deeper and longer recession which would hurt the country more in the long term – allowing borrowing to rise is the right decision for the country.”

Insisting the government was only borrowing money to invest back into the economy, Mr Darling was greeted with loud jeers from the opposition benches.

The Chancellor said the government would contribute towards this extra spending by finding an additional £5 billion in savings by the year 2011.

He also pledged that the Government would take steps to improve the supply of mortgages, avoid repossessions and increase the number of new homes.

For travellers, air passenger duty is to be reformed into a four-band system, ensuring those who travel further and have a larger environmental impact meet the cost.

For the business community, Mr Darling said Revenue and Customs would allow firms facing difficulties to spread payments of all business taxes over a timetable they can afford, for as long as they need. He also widened the tax exemption rate for companies with empty commercial premises.

The 0.5 per cent rise in National Insurance, which is now on the way, is likely to hit middle income earners the worst, according to the BBC’s political correspondent Nick Robinson.

Energy companies were warned that watchdog Ofgem would be asked to monitor energy price changes and publish quarterly reports on the link between wholesale and retail prices.

An extra £100 million is to be provided, with a further £50 million brought forward, to help 60,000 more households insulate their homes.

Major mortgage lenders have agreed to wait at least three months after a borrower falls into arrears before seeking repossession, the Commons was told, and a new Lending Panel will monitor lending to industry and households.

Mr Darling acknowledged Britain could not “insulate itself” from a global downturn, but he insisted: “The UK economy faces these challenges from a position of relative strength.”

“Interest rates on their own are not enough to stimulate the economy, as most people recognise. So we need action now to boost economic activity together with the real help announce today to help us emerge quicker and emerge stronger from these difficult times and face the future with confidence.”

By Carl Jones