Tories accuse Darling of 'giant con' over plans to raise taxes after recession is over



Chancellor Alistair Darling said the recession will be 'short and sharp'



Alistair Darling came under fire from the Tories today after he appeared to hint that taxes will rise in the long term to fund the Government's borrowing spree.

The Chancellor signalled that Britain will suffer a short, sharp recession, claiming that it would bounce back into growth in 2010.



But in a newspaper interview, he also suggested that taxes would have to go up to fund rising borrowing, stating 'at some stage you have to pay for it'.



He predicted the economy could shrink by 1 per cent next year and that the recession would be harsh.

However, it will be over by 2010, when the economy would recover quickly and strongly, he told the Independent.



'We are going into recession but I remain confident that we will get through it', he said.



Mr Darling added that the Government had to get 'sharper and smarter' as he outlined his plans to raise taxes in the coming years to bring borrowing back under control.



'It is right to let borrowing rise. It is also important that we come back into balance over the medium term', he said.



'The basic principle is to support the economy now but you have got to make sure you live within your means.'

His report on November 24 is likely to show a big increase in public borrowing from £43biliion to £65billion, for which he will blame falling government revenues.



While the government has been keen to avoid using the 'R' word, Mr Darling's comments are being seen as the clearest indication yet that a recession will happen.



His views come after Bank of England governor Mervyn King said he was ready to reduce rates to ‘whatever level is necessary’ to counter the economic storm.

That could mean interest rates being slashed to zero for the first time as the Bank of England battles the deepening recession.

Mr King warned Britain’s economy could shrink by at least 2 per cent during 2009, pushing inflation into negative territory for the first time in almost half a century.

A worst-case scenario could see a slump of more than 3 per cent in gross domestic product, the biggest year-on-year fall since the beginning of 1981.



Mervyn King said that interest rates will have to fall even further

Former Tory Chancellor Ken Clarke, who led Britain’s recovery from Black Wednesday, warned the economy was heading for a ‘catastrophic crisis’ far worse than ‘anything that has occurred in my lifetime’.

‘There will be a very serious recession next year,’ he said. ‘I think the big problem in 2009 will be the catastrophic fall in consumer spending demand, spending in shops will get worse.’



The Bank confirmed the country has already entered its first recession since the early 1990s, blaming the slump in lending and chaos in the financial markets. It said national output will fall at an annual pace of around 2 per cent by the middle of 2009.

Inflation will drop to 1 per cent. However many warn that deflation - where prices for goods actually fall - may be on the horizon.

Jobless numbers are also set to rise ‘significantly’ for the next two years, driving down incomes, the Bank warned in the wake of a surge in unemployment figures.

Separately, more than a million people are now struggling with their mortgages because of the credit crunch, its quarterly inflation report showed.



The grim assessment came as Gordon Brown again hinted at temporary tax cuts - funded by Government borrowing - to be unveiled in a Pre-Budget report on November 24.

The Prime Minister told MPs: ‘I think that people are beginning to understand that we are dealing with a new situation of low inflation next year, a downturn and a credit crunch.

‘And that requires very special measures indeed to deal with unprecedented circumstances.’

Mr Brown insisted there was growing international support for a ‘fiscal stimulus’ package, code for tax-cutting measures.

Meanwhile, former Labour deputy leadership candidate Jon Cruddas said yesterday Mr Brown should drop his mantra that Britain was well placed to weather the crisis.

He said: ‘We have to put behind us some of these slogans, some of the language of more benign economic [times].

‘This is a very different environment and it demands very different remedies.’

Shadow Chief Secretary to the Treasury Philip Hammond said: ‘One by one senior Labour MPs are lining up to tell us what Gordon Brown can’t bring himself to admit.

‘Yesterday the Welfare Minister let the cat out of the bag by telling us that taxes would have to rise to pay for more borrowing.

‘Now we have a former Labour deputy leadership contender saying the Prime Minister should abandon his ridiculous claim that Britain is well prepared for the recession.

‘It’s good to know that at least some Labour MPs are prepared to be straight with people.’

Asked whether interest rates would have to be slashed to zero, Mr King yesterday repeatedly refused to rule out the drastic measure.

The Monetary Policy Committee’s quarterly growth and inflation outlook came less than a week after it axed rates by 1.5 percentage points to 3 per cent.

Perils of Deflation



The Bank of England yesterday warned there is a 20 per cent chance the UK could spiral into deflation in 2010.

Deflation is the inverse of inflation, and is seen as one of the worst economic diseases a country can catch.

It involves a massive squeeze on lending, which leads to sustained falls in prices on the High Street.

The Bank of England's rate-setters slashed the price of borrowing by 1.5 per cent

The costs of food, clothing, cars, electronic goods, and services plummet as companies are forced to repeatedly slash prices. This can drive thousands of firms out of business and send unemployment to stratospheric levels.

For those with large debts, the consequences are disastrous. During inflation, debts become easier to service over time as the value of money is eroded.

But with deflation the opposite happens, resulting in rocketing debt defaults and more trouble for the banking sector.

This last struck the U.S. and European economies during the Great Depression of the 1930s.