Balls calls for VAT cut to 'kick-start' economic recovery

Reducing the sales tax back to 17.5 per cent for a period would help to stimulate consumer spending, bring down inflation and boost job creation, he argued in a keynote speech.

Accusing George Osborne of risking permanent damage to the economy by pressing ahead with stark austerity measures, he said the Chancellor needed to act to boost confidence.

Mr Osborne raised VAT to 20 per cent from January.

"The question is not the cost to George Osborne of paying for this temporary emergency tax cut, but the price our country will pay if he carries on regardless," he said.

"Slowing down the pace of deficit reduction with a temporary VAT cut now would give the flat-lining economy the jump start it so urgently needs, boost jobs and be a better way to get the deficit down for the long term."

Mr Balls accused the Chancellor of "keeping his fingers crossed and stubbornly ignoring the economic evidence" that his plan is not working.

He drew a parallel between Mr Osborne's refusal to produce a "Plan B" with the ill-fated decision by the Conservatives to enter the European Exchange Rate Mechanism (ERM) in the 1990s.

"George Osborne risks joining the ranks of chancellors, finance ministers and economists who should have known better, but allowed political imperatives to trump economic realities," he said.

"I do not believe this is economic judgment at work - but a political gamble with the nation's economy from a Chancellor shaping his policies not around constitutional responsibility, sound economics and the protection of jobs, growth and homes, but around a fixed political strategy to win an election in 2015."

Unlike his predecessors ahead of the UK's withdrawal from the ERM on Black Wednesday in 1992, the Government has the option to change course, Mr Balls said.

While Labour made some mistakes - notably in failing to regulate the banks sufficiently, blaming it for today's problems was a strategy "based on total fiction", he insisted.

"The path that our economy is being taken down is the wrong one, as the evidence is increasingly suggesting," he concluded.

Prime Minister David Cameron said tax cuts at this time would worsen the economic problems faced by the UK.

"Those who say 'Well, you ought to go out and slash taxes, or spend more money, or do some more government investment', all you would be doing if you did that would be making the problem of your deficit, your overdraft, worse.

"If you have maxed out your credit card, if you put off dealing with the problem, the problem gets worse," he told voters at a PD Direct question session in Lincoln.

"As a country, if you go on borrowing like we are, you are putting the problem on to your children and I think that's totally irresponsible.

"So here we are today, spending 120 million a day just on the interest on our debt. If we go on doing that I think it's totally irresponsible to the next generation."