Q&A: Pre-Budget report

Mr Darling's second pre-Budget report could signal a dramatic change of direction

The 2008 pre-Budget report is Alistair Darling's first chance since the banking crisis in the autumn to say how the UK economy is likely to perform, and how the crisis might affect the public finances.

Here's our guide to the pre-Budget report (PBR) which is likely to be one of the most important in recent years, with the government widely expected to take measures to stimulate the economy.

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What is the pre-Budget report?

Published each autumn, the pre-Budget report is the Treasury's chance to explain in advance the measures likely to be presented in the full budget the following spring, and to update its economic and budget forecasts.

In 1997, shortly after becoming chancellor, Gordon Brown introduced the annual pre-Budget statement.

He heralded it as a measure that would add predictability and stability to government, while reducing uncertainty for business and the markets.

Increasingly, however, it has been used as an opportunity to launch new policy initiatives.

This year, in a big departure from previous years, the government is expected to announce immediate tax cuts and an expansion of public spending to help boost the economy - essentially making it an emergency mini-Budget.

Reports suggest Mr Darling may also pledge that Labour will introduce a new 45% income tax rate on earnings over £150,000 if it wins the next election.

What will Alistair Darling be talking about?

The pre-Budget report comes amid growing signs that the UK is entering a recession.

There is now a widespread belief that the economy - which already has shown negative growth in the July - September quarter - will continue to shrink through most of 2009.

Mr Darling has already made it clear that the slowdown will drastically affect the Treasury's budget forecast, with the budget deficit expected to rise sharply.

It is also expected that Mr Darling will announce a modification of the fiscal rules that were introduced by Gordon Brown in 1997 to limit government borrowing to sustainable levels.

In particular, he likely to say that the current crisis means that the government will no longer be able to keep overall government debt to its target of 40% of GDP

Will he be saying anything about taxes?

Usually there are few tax or benefit measures in a pre-Budget Report. That's really reserved for the Budget in spring.

But in the current difficult economic circumstances, it is widely expected that the government will announce an immediate cut in Value Added Tax (VAT) to 15% from 17.5%.

The chancellor is also expected to help businesses through the postponement of the next rise in corporation tax.

He is also expected to postpone the planned rise in vehicle excise duty, and extend the system of rebates for people affected by the abolition of the 10 pence tax rate.

What about public spending?

The other major way that the government could help in an economic slowdown would be to increase public investment on roads, schools and hospitals.

The advantage would be that such spending could help counter the expected rise in unemployment, and it would all be spent in the UK.

However, the difficulty is that it is hard to increase such investments quickly, in time to deal with the looming recession.

Such higher public spending will also have to be paid for in the longer term. Therefore it is expected that some government budgets will be trimmed in the years ahead, in addition to increased efficiency drives.

What do the other parties want from the pre-Budget Report?

The Conservatives have come out with their own proposals for tax changes to help beat the recession.

They want a temporary cut in National Insurance contributions for companies that agree to take on additional workers.

Shadow Chancellor George Osborne says that any tax cuts will have to be fully funded, and otherwise the government risks putting the pound at risk.

The Conservatives have also said that, with the economic slowdown, they will no longer match the government's future spending plans if they win the next election.

The Liberal Democrats want to lower taxes for the low-paid but fund this by increasing other taxes, such as on the environment.