The VAT reduction, to "help stimulate growth", comes into force from Monday December 1 before it reverts back to 17.5 per cent at the end of 2009. Retailers were urged to cut prices as soon as possible.

How the VAT cut could affect your shopping bill »

But, to jeers from opposition MPs, he added the cut in VAT on tobacco, alcohol and petrol will be offset by increasing duties on these products, by a level which should keep the overall cost the same.

And he warned national insurance will also have to rise - as will the top rate of income tax as the economy begins to pick up from 2010.

The Chancellor warned borrowing would rocket to £118 billion next year as the Government ensured money flowed into the economy when it was needed.

"There is a choice," he told MPs. "You can choose to walk away, let the recession take its course, adopt a sink or swim attitude, letting families go to the wall. That is no action plan.

"Or you could, as I have decided, as governments of every shade around the world, to support businesses, to support families, by increasing borrowing which will also reduce the impact and length of the recession.

"I will do whatever it takes to support people through these difficult times. That's why my Pre-Budget Report today represents a substantial fiscal loosening to help the economy now with a £20 billion fiscal stimulus between now and April 2010, around one per cent of GDP."

He unveiled a total of £15 million to fund a new debt advice service available to anyone free of charge if they need it. There will also be a new Lending Panel that will monitor lending to industry and households.

A new Saving Gateway will be set up so, from 2010, up to 8 million people on low incomes who invest money in it will get 50p added for every £1 they save.

Where homeowners have run into difficulties with their mortgages, he revealed an agreement with lenders that they will wait at least three months before seeking repossession.

To ease the pressure on households from the cost of heating bills, the watchdog Ofgem is to monitor pricing by companies with quarterly reports on the link between wholesale and retail prices that could lead the Government to use statutory powers to lower bills if necessary.

Pension credit will rise in April from £124 to £130 a week for individuals and from £189 to £198 for couples. 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.

Pension and child benefit increases will take effect in January, three months early, and every pensioner will get a one-off payment of £60 from January, £120 for couples.

Mr Darling said the ceiling on tax relief given to people with pension funds of up to £1.8 million would be maintained up to and including 2015-16.

Environmental measures include £535 million more on energy efficiency, rail transport and environmental protection. Air passenger duty is to be reformed into a four-band system, ensuring those who travel further and have a larger environmental impact meet the cost.

An extra £100 million is to be provided, with a further £50 million brought forward, to help 60,000 more households insulate their homes.

Mr Darling said differential first-year rates of Vehicle Excise Duty would be introduced in April 2010.

New rates will be phased in and the increases lower. In 2009, duty rates for all cars will only increase by a maximum of £5. From 2010, the maximum increase for the most polluting cars will be £30 instead of £90, with less polluting cars seeing no increase or a cut of up to £30.

Motorists will face a 2p per litre rise in the cost of petrol from December 1 when the deferred fuel duty increase is imposed - wiping out the VAT reduction announced today.

There will also be further increases in April 2009 and April 2010, and with VAT reverting back to 17.5 per cent at the end of December next year, motorists will by hit by another rise.

As expected, the Chancellor also unveiled a new rate of Income Tax of 45 per cent which will be introduced from April 2011 on incomes over £150,000.

High earners, those with incomes between £100,000 and £140,000, will also see their personal allowances reduced to bring them into level with those of basic tax payers, he said. Those with incomes above £140,000 will see the full value of the personal allowance withdrawn.

The temporary increase in personal tax allowance brought in after the 10p tax fiasco will become permanent.

It will be increased to £145 a year in April, Mr Darling added, which would benefit 22 million basic rate taxpayers.

All rates of National Insurance contributions will rise by 0.5 per cent from April 2011, but the starting point for National Insurance is to be aligned with that of Income Tax.

To help small firms, which he described as "the engine of the economy", Mr Darling said he was offering a temporary increase in the threshold for empty property relief, with empty commercial properties with a rateable value below £15,000 exempt from business rates for 2009/10.

Revenue and Customs will allow firms facing difficulties to spread payments of all business taxes over a timetable they can afford, for as long as they need.

The 1p increase in the small companies rate of Corporation Tax will also be deferred, leaving their 2009 tax rate unchanged.

The Chancellor announced a £4bn deal with the European Investment Bank to provide money to UK banks for small and medium-sized enterprises (SMEs), which seven banks had already expressed an interest in.

Around £1bn will be available by the end of the year on top of credit for small firms through a temporary Small Business Finance Scheme worth a further £1 billion.

The National Employment Partnership will work with 20 of the biggest employers to fill more than 500,000 unfilled vacancies, and the Government's Rapid Response Service will expand to help those thrown out of work in all redundancies, not just those at the largest workplaces.

The Chancellor said a further £1bn of support will be offered to companies which export goods, through the Export Credit Guarantee Department.

From January, it will offer a temporary facility to support the availability of short-term working capital for smaller exporters.

Amid loud interruptions from the Tories, he earlier told the Commons the UK was caught up in an "unprecendented global crisis" and promised to take the lead in combating the problems domestically and on the world stage.

Mr Darling said the World Bank and other institutions were confident the global economy will recover strongly, doubling in size over the next two decades.

Outlining the fiscal picture, Mr Darling said interest rates would not be enough to stimulate the economy, warning that the International Monetary Fund had predicted a year-long fall in economic output across all developed countries next year.

UK GDP contracted by 0.5 per cent in the three months to September and growth this year is forecast to be 0.75 per cent.

Growth is forecast to be between 1.5 per cent and 2 per cent in 2010, with the economy continuing to recover in the years after that. In future years the economy to recover towards trend rate of growth of 2.75 per cent.

Output in the UK is forecast to fall for the first two quarters of next year but then expected to recover because of decisions taken in this PBR, Mr Darling said

Inflation was due to come down, he added, to half a percent by the end of 2009.

Borrowing will rise to £78 billion this year and £118 billion next year, 8 per cent of GDP. But from 2010, it will fall to £105 billion, £87 billion, £70 billion and £54 billion and by 2015/16 UK will again be borrowing only to invest.

But the Shadow Chancellor George Osborne, ridiculed the pre-budget report and accused the Chancellor of leaving an "unexploded tax bomb" ticking under the public purse.

"That is the bill for Labour's decade of irresponsibility," he told MPs and said Mr Darling was giving away £20 billion while taking back £40 billion through tax hikes, including the national insurance rise, which he described as a "tax on jobs".

And Mr Osborne said the Prime Minister's promise to end boom and bust had proved "one of the greatest deceits ever told to the British public".

Mr Osborne said the rise in the top rate of income tax would raise just 5 per cent of the "black hole" the Chancellor had to fill in the nation's finances and was "designed to distract attention" from a hike in National Insurance.

He told Mr Darling: "You didn't give your figures so I will. A £4 billion tax increase on families and jobs.

"More in tax for a qualified nurse, more for a police officer, £100 million on the annual NHS wage bill, £2 billion from British business.

"This isn't just a bombshell, it is a precision-guided missile at the heart of a recovery."

Vince Cable, for the Liberal Democrats, said his party agreed with measures on repossessions, action on small business lending and the postponement of the decision on retrospective VED.

"But this is not a normal Pre-Budget statement, this is a national economic emergency and what is required alongside radical cuts in interest rates, radical action on bank lending is a serious tax cut concentrating on the low-paid."

He added: "What I fail to see is how the economy gets a major stimulus from for example a £5 cut in a £220 imported flat screen television or a 50p cut in a £25 restaurant bill.

"Surely it would be much more sensible to put money directly in the pockets of low-paid workers by cutting their income tax?

"Not the pathetic £25 they are being offered and if they earn over £20,000 a year the prospect of tax increases.

"What surely is needed is a comprehensive approach which cuts income tax on low-paid, middle income families, removing the vast plethora of tax reliefs and allowances which the wealthy benefit from.

"Not this very limited fig leaf for redistributive policy."

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