British chancellor Alistair Darling today slashed VAT in a £20 billion cash boost to revive the ailing economy.
But he said the measures would have to be paid for with increases in duty on petrol, alcohol and tobacco.
National insurance will also have to go up - as will the top rate of income tax as the economy begins to pick up from 2010.
The Chancellor warned the Commons that borrowing would soar to £118 billion next year as the government ensured that money flowed into the economy when it was needed.
He told the House of Commons that the UK would be in recession by the end of the year, with output contracting over the course of 2009. But he insisted that as a result of the measures he was taking that there would be a healthy recovery in 2010.
He said that his Pre-Budget Report set out a "comprehensive plan" to deal with the effects of what was an "unprecedented global crisis".
He said that the measures he was taking would mean that the downturn would be "shorter and shallower" than would have been the case.
The Pre-Budget Report represents a £20 billion fiscal stimulus between now and April 2010, one per cent of gross domestic product. It will include extra public spending but will also include a warning taxes will rise later to pay for the boost.
It includes a cut in VAT from 17.5 per cent to 15 per cent from December 1st. The rate will return to the current level in 2010. “The VAT reduction is the equivalent of the Government giving £12.5 billion to consumers to boost the economy,” Mr Darling said.
The reduction in the rate of VAT on goods is likely to have a big impact on Ireland.
Mr Darling urged retailers to pass on the VATv cut to shoppers as soon as they could.
"This temporary reduction … will make goods and services cheaper and, by encouraging spending, will help stimulate growth," he said.
Mr Darling said he was going to "offset the VAT reduction" by increasing duties on petrol, alcohol and tobacco "by an amount which should keep the overall cost to consumers the same this year".
He announced that workers will face a tax hike in years to come. Mr Darling said that by 2011, when he expects the economy to be recovering strongly, half a per cent will be added to all rates of National Insurance contributions for both employees and employers.
Mr Darling said overall growth this year would be just 0.75 per cent - with a second successive quarter of negative growth in the final three months, the technical definition of a recession.
Next year, he predicted the economy would shrink by between 0.75 per cent and 1.25 per cent, but would then bounce back in 2010 with positive growth of 1.5 per cent to 2 per cent.
Shadow chancellor George Osborne said the package would double the national debt to £1 trillion and leave a "huge unexploded tax bomb" ticking under the public purse.
"That is the bill for Labour's decade of irresponsibility," he told MPs.