What to watch out for in the PBR

What might the Chancellor pull out of his famous red box?

The pre-Budget report is normally a much quieter occasion than the full Budget in the spring. But these are not normal times.

Recession is looming and the credit crunch is still gripping not just the UK, but economies around the world.

Against this backdrop, Chancellor Alistair Darling is expected to unveil a package of measures designed to get consumers spending and boost businesses.

However, he is also likely to explain how taxes might have to go up in the future when the economy recovers in order to close the growing budget gap.

So what might be in it for you?

TAX CHANGES FOR INDIVIDUALS

VAT

As the chancellor is looking for something to encourage people to go out and spend, reports suggest that he is likely cut the rate of VAT, currently 17.5%.

The government could reduce it to 15% without breaching any EU rules, but at an estimated cost of £12.5bn, it wouldn't be cheap.

A cut in VAT would be headline-grabbing, but it would also be indiscriminate.

Any cut in VAT would also have to be temporary, with the rate returning to its old level within a year or two.

Tax credits and allowances

If he wants to target the cuts more, the chancellor could increase tax credits for people on low incomes.

Changing personal allowances to increase the amount people can earn before paying tax would also put more money in their pockets.

At the very least, economists expect him to extend the temporary help he gave to people who had lost out after the scrapping of the 10 pence tax band in the 2007 Budget.

However, with any changes in personal taxation, if people save the extra money for a rainy day rather than spending it, the measures would not have the desired effect.

Tax increases

The Chancellor is likely to announce a series of tax increases in the future in order to fund the tax cuts now.

One change that has been widely trailed is an announcement by the Chancellor of a new higher rate of 45% for people who earn more than £150,000 per year.

The measure, which would raise several billion pounds, would only be implemented after a General Election, as it would breach Labour's pledge not to raise income tax rates.

Another way to substantially increase taxes on the rich would be to raise the upper earnings limit for National Insurance contributions.

This potentially could raise even more revenue, as the rate of national insurance is equivalent to 10p in the pound.

Fuel and vehicle excise duty

The government has already delayed the introduction of an increase in fuel duty that was due to come in October.

The chancellor could extend that freeze on fuel duty to help motorists. However, with oil prices falling, the pressure to do so is lessening.

In the 2008 Budget changes in vehicle excise duty were announced which would significantly increase the cost to drivers of gas guzzlers.

Given falling car sales, the chancellor could choose to alter or delay these increases, but this would be unpopular with the environmental lobby.

Stamp duty on houses

Stamp duty on houses costing less than £175,000 was scrapped in September. Designed to kick-start the housing market, the new threshold was intended to last a year.

The Chancellor could extend that measure or make it permanent.

BENEFITS BOOST

Winter fuel payment

Not part of any economic stimulus package, but the chancellor may also decide to increase the winter fuel payment.

Amid substantial rises in fuel prices, the over-60s were given an one-off increase of £50 this winter and the over 80s were given an extra £100.

The number of households facing fuel poverty is expected to rise, so this one-off boost could be made permanent or extended to other low income families.

Or the government could increase the pension credit, which would give more money to poor pensioners. or increase the amount paid to help poor families who have children.

TAX CUTS FOR BUSINESS

Rather than helping tax-paying consumers, employers organisations are calling for help for businesses in order to preserve and create jobs.

Tax breaks

Mr Darling could borrow a Conservative idea and introduce tax breaks for employers taking on new staff.

Alternatively, he could allow businesses to defer paying tax for a short period, effectively giving them a government loan.

The Institute of Directors favours a 4p cut in corporation tax to help businesses cope in the downturn.

This would cost an estimated £7bn. If the cut was confined to the small companies' rate, the cost would be reduced to £1.2bn.

The CBI has also called for targeted help to encourage firms to retain workers.

GOVERNMENT SPENDING

Public works

Along with taxation, the government could decide to try to stimulate the economy by increasing government spending.

Large public works such as building new schools, hospitals or wind farms would provide employment and help the struggling construction industry.

This could involve bringing forward already-planned projects. But the effect of this could take longer to feed through to the economy than tax cuts.

Under current Treasury rules, the government is allowed to borrow to invest without breaking its fiscal limits.

But the government is likely to have to announce a severe squeeze on public spending in the future in order to curb the growing budget deficit.