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Britain's Brown defends plan to boost economy

LONDON (Reuters) - British Prime Minister Gordon Brown on Sunday defended his plan to inject billions of pounds of borrowed money into the economy to try to stave off a deep recession, saying failure to act could cause permanent damage.

Brown’s Finance Minister Alistair Darling on Monday will unveil a package of tax cuts and extra public spending expected to total up to 20 billion pounds ($29.70 billion) in an attempt to keep Britons spending and stop the economy seizing up.

The cash injection will be paid for with borrowing, which could send Britain’s budget deficit ballooning to around 120 billion pounds in the next financial year.

“We are taking action now to prevent permanent damage later,” Brown said in an interview with the BBC, in which he said he was not planning to call an election in 2009. “Not to act is both irresponsible and uncaring,” he said.

Darling would set out a “concerted and coordinated plan of action, right across the board,” adding that the package had to be substantial to have an impact, he said.

Britain, buffeted by the global financial crisis, is on the verge of recession, with house prices slumping, unemployment rising and manufacturing output shrinking.

The centerpiece of the plan will be a temporary cut in sales tax paid on many goods, several newspapers reported on Sunday.

They said the tax, known as value added tax, or VAT, could go down to 15 percent from 17.5 percent for one or two years, giving a pre-Christmas boost to consumers’ spending power.

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 tax concerns that have led several big companies to shift their tax domicile to Ireland.

A Treasury spokesman declined to comment on the reports.

Darling is also expected to announce tax cuts for low earners, help for home owners struggling to pay mortgages and plans to speed up infrastructure projects.

BORROWING BINGE

Opposition Conservative leader David Cameron accused the government of going on a borrowing binge that would have to be paid for with higher taxes later. “You cannot borrow your way out of a borrowing crisis,” he told the BBC.

Brown’s handling of the financial crisis has lifted his flagging popularity ratings, but his hopes of winning the next general election, due by mid-2010, may depend on the recession being relatively short and shallow.

An opinion poll published in the Sunday Mirror gave the Conservatives an 11-point lead over Brown’s Labor Party, contradicting recent surveys which had seen Labor fighting back to within about three points of the Conservatives.

Brown dismissed speculation that he might be tempted to call an election next year. “I’m not planning it at all,” he said.

The government is leaning on the banks to step up loans to credit-starved small businesses. Royal Bank of Scotland pledged on Sunday not to raise overdraft fees for small companies or make demands for early repayment.

Darling is set to ditch the government’s long-standing rules limiting borrowing and to slash growth forecasts. A Reuters poll forecasts the economy will shrink 1.3 percent next year.

If Darling cannot persuade investors Britain will close the budget gap in future years, the pound, which has slumped against the euro and dollar in recent weeks, could slide further.

Darling is expected to soothe the market by announcing plans for deferred tax rises and public spending curbs.

Germany, the Netherlands and Spain have already announced stimulus plans and a European Union package, worth up to 130 billion euros ($162.8 billion), will be unveiled on Wednesday.

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