Leaders in 'VAT bombshell' clash

David Cameron: 'They are planning a VAT bombshell'

David Cameron claims leaked documents show Gordon Brown is secretly planning a future VAT "tax bombshell".

In stormy Commons exchanges, the Tory leader accused Mr Brown of giving the UK the "debt levels of Italy and the accounting practices of Enron".

The PM admitted ministers considered increasing VAT to 18.5%, or higher, but had now rejected such a move in favour of a VAT cut funded by borrowing.

He called Mr Cameron the "do nothing leader of a do nothing party".

Chancellor Alistair Darling's pre-Budget report on Monday sparked stormy scenes at prime minister's questions - ahead of an emergency debate forced by the Tories.

'Hard pressed'

Launching his attack by brandishing a mistakenly published Treasury document, Mr Cameron demanded: "If the government doesn't have a secret plan to increase VAT, why did the Treasury minister put his signature to it?"

The Conservatives say there is a "black hole" in the government's plans to repay record borrowing, which would have been filled by a 1% VAT rise.

Mr Brown replied that the government had looked at "every option" adding: "We looked at the 1980-83 recession and when the Conservatives raised VAT from 8% to 15% hard working families were hurt.

Historians will enjoy looking hard at this. They will be fascinated at the light it shines on Gordon Brown's last minute decision making. Nick Robinson BBC political editor Read more on Nick's blog

"We looked at the 1990s and when the Conservatives raised VAT from 15% to 17.5% hard pressed families were hurt.

"And when you were adviser to the Treasury they tried to raise VAT on fuel to 17.5%

"We looked at all options. We rejected the option of raising VAT. We decided we would lower it and we hope the Conservative Party will support us."

Mr Cameron hit back by accusing Mr Brown of bringing the country to the brink of bankruptcy, with the same levels of national debt as when Labour was in power in the 1970s, when the country had to be bailed out by the IMF.

'New Labour dead'

"The fact is this prime minister has given us the debt levels of Italy and the accounting practices of Enron," said the Tory leader to cheers from his own benches.

He added: "Isn't the real lesson from the PBR this: the country is going bankrupt, he's been found out and New Labour's dead?" demanded Mr Cameron.

Mr Brown said the Tories would "do nothing" to help families and businesses hit by the downturn and the UK's debt levels were still lower than many other industrialised nations.

Unless we get a more effective response to this crisis from both the major parties that anger and despair will continue Vince Cable Lib Dems The Full Story: PM's questions

Later, in an emergency Commons debate on the pre-Budget report, Chancellor Alistair Darling said the Treasury minister's name had ended up on the document by mistake and he had not seen it or authorised it.

On Monday, he unveiled a 13 month cut in VAT from 17.5% to 15% in an effort to get consumers spending.

But the BBC understands a rise in Value Added Tax to 18.5% from 2011 was in the government's plans until less than a week ago.

Mr Darling told MPs that he had decided a rise in National Insurance contributions was the "fairest" way to raise money while VAT would return to 17.5% after 13 months.

Scotch whisky

"That is the government's position and that remains the government's position," he said.

But he said later that measures announced to keep the price of alcohol and cigarettes the same - by raising duty to compensate for the VAT drop - had not "actually achieved that" in relation to spirits and an order would be moved to cut the increase in duty planned for them.

It follows protests from the Scotch whisky industry that the measures would put 29p on the price of a bottle of whisky.

Mr Darling told MPs these were "extraordinary economic circumstances" and there was a choice between "supporting people, supporting businesses, supporting the economy ... or walking away, saying we will do absolutely nothing and letting recession run its course."

It was important to get the banks lending again, he said, and some action had been taken but he added "we do need to go further". He said the government was "ready and willing and it will hold the banks to account".

During the same debate shadow chancellor George Osborne said the pre-Budget report had "completely fallen apart in just 48 hours".

'Hope to despair'

He told MPs the doubling of national debt had shocked the country, National Insurance rises would hit people on "modest incomes" and "virtually nothing" would be raised by a new 45p top rate of tax.

He added: "We know about the secret plan for VAT. They have totally destroyed public trust in the government's motives, confirming what everyone suspects - that Labour's temporary giveaways now are dwarfed by permanent tax rises later."

He asked the chancellor to confirm or deny that the government considered raising VAT further, to 20%, in 2012.

Asked about the charge later, the prime minister's spokesman did not deny it but said: "There were a whole range of options considered. The key thing is what we did ... and we reduced it [VAT]."

Mr Osborne concluded: "Now their emergency budget is unravelling, their secret tax bombshell is revealed, their scorched earth policy is leading this country's economy to ruin.

"They have run out of money and the sooner they are run out of office the better."

Former Conservative chancellor Ken Clarke suggested the Treasury had wanted "more tax increases" to be included in the PBR but Downing Street did not and they had instead been "substituted by wholly incredible growth forecasts". Chief Secretary to the Treasury Yvette Cooper said he was "talking nonsense".

But Liberal Democrat Treasury spokesman Vince Cable said the government's forecast for growth were "wildly optimistic" - and only supported by investment banks.

He said it was more likely that economic growth in the next two years would be "negative or negligible".

He also said the plans concealed "a drastic cut in public investment over the period to 2012/2013" which he said made a nonsense of the government's claim to be borrowing to invest.

He said there had been a transition "from hope to despair" among the public.

"Unless we get a more effective response to this crisis from both the major parties that anger and despair will continue".