Alistair Darling has said VAT will be reduced by 2.5 per cent as he warned Britain faces "economic uncertainty not seen for generations".

Delivering his Pre-Budget Report in the Commons, the Chancellor announced a cut to 15 per cent coming into effect from December 1 for 13 months before returning to 17.5 per cent at the beginning of 2010.

Mr Darling said he wanted to take "fair and responsible steps" to protect and support businesses and families while putting public finances on the right path for the future and said the VAT reduction is the equivalent of the Government giving £12.5 billion to consumers to boost the economy.

And as expected, Mr Darling also announced new rate of income tax of 45 per cent for those earning at least £150,000 a year. This will begin in April 2011 and affect the top 1 per cent of incomes. He added all rates of National Insurance contributions will rise by 0.5 per cent from next year.

However, Mr Darling said he will "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".

Setting out plans for a massive £20 billion shot in the arm for the ailing economy as it heads for recession, Mr Darling said: "My central objective is to respond to the consequences of this global recession on our country, both now and in the future, so that we are ready to take full advantage of the recovery of the world economy."

To help small businesses, he said the Government will offer credit through a temporary Small Business Finance Scheme worth £1 billion.

Additionally, the increase in the small companies rate of Corporation Tax will be deferred, leaving their 2009 tax rate unchanged, while firms facing difficulties will be allowed to spread payments of all business taxes over a timetable they can afford, for as long as they need.

However, borrowing will rise to £78 billion this year and to an eye-watering £118 billion next year, 8 per cent of GDP, but will eventually fall to £54 billion. By 2015/16 the Government will be borrowing only to invest. Efficiency savings of £5 billion can be made by 2010/11, he said.

Shadow chancellor George Osborne said the measures will lead to a £1 trillion national debt and leave a "huge unexploded tax bomb" ticking under the public purse, adding: "That is the bill for Labour's decade of irresponsibility."

Mr Darling also announced that major mortgage lenders had agreed to wait at least three months after a borrower falls into arrears before seeking repossession. And he said £15 million of new funding for free debt advice will be open to all.

He also said there would be extra help for workers made redundant, including increasing the limit for help with mortgage interest repayments from £100,000 to £200,000.

He said pension and child benefit increases will take effect in January, three months early, and every single pensioner will get a one-off payment of £60 from January, while couples would receive £120 for couples.

Mr Darling also announced pension credit will be increased in April from £124 to £130 a week for individuals and from £189 to £198 for couples. He said state pensions will increase in line with the highest rate of inflation this year, an increase of £4.55 a week for a single person.

For motorists, duty rates for all cars will increase by a maximum of £5, Mr Darling said. And as new car sales plummet, he said the maximum increase for the most polluting cars will be £30 instead of £90 from 2010, with less polluting cars seeing no increase or a cut of up to £30.

Mr Darling insisted that as a result of the measures he was taking, there will be a healthy recovery in 2010.

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