The Chancellor tore up his own projections, made in the Budget only eight months ago, to reveal the scale of the economic crisis facing the UK and the vast sums needed to spend it out of the recession.

Unveiling his Pre-Budget Report (PBR), Mr Darling claimed Britain was facing the recession from a "position of relative strength" – prompting hoots of derision from opposition benches in the Commons as Labour MPs sat glum-faced.

George Osborne, the Tory shadow chancellor, said Mr Darling had "placed a huge unexploded tax bombshell timed to go off underneath the future economic recovery" with his massive borrowing demands.

But the City appeared more impressed, with the FTSE rallying as Mr Darling gave his report, closing up 9.84 per cent, the highest ever one-day rise.

Mr Darling said: "In these exceptional circumstances, allowing borrowing to rise is the right choice for the country."

He scrapped the fiscal rules introduced by Gordon Brown a decade ago, saying it would be "perverse and damaging" to attempt to keep net debt at just 40 per cent of the economy at a time of financial crisis, and when inflation was expected to drop almost to zero.

According to figures in yesterday's PBR, he will be forced to borrow more than £500 billion by 2014 – almost £300 billion more than expectations – by which time public-sector net debt will be £1,084 billion, or more than £1 trillion.

This means the economy will not start to come back towards balance until 2015-6 – and not a single year until then will see income from taxes exceed the amount of government spending.

As expected, Mr Darling announced a temporary cut in VAT. It will fall from 17.5 per cent to 15 per cent for 13 months from 1 December in an effort to kickstart a pre-Christmas boom on the high street.

He also announced the introduction of a 45 per cent higher tax band for people earning above £150,000. This will be introduced from April 2011.

Pensions and child and family tax credits will also rise, as will personal income tax allowances. But he sparked concern when he revealed that there would be a 0.5 per cent increase in National Insurance for both employees and employers from April 2011.

The Chancellor's aides said the effect of the changes would be to benefit people on incomes under £40,000. Those earning between £40,000 and £100,000 would pay an extra £150 in tax a year.

Mr Darling also moved to prevent his temporary cut in VAT resulting in cheaper alcohol, cigarettes and petrol. All will face higher levies – with whisky and fuel more expensive than now.

The Scotch Whisky Association said the 8 per cent rise in excise duty – combined with the temporary 2.5 per cent cut in VAT – amounted to a 4 per cent tax increase on a bottle of whisky, on top of a 9 per cent excise duty increase in March.

Mr Osborne said the Chancellor had "borrowed more on the nation's credit card than all previous governments put together – and now he's taking out another credit card".

He added: "It is confirmation of the time-old truth that in the end all Labour chancellors run out of money and all Labour governments bring this country to the verge of bankruptcy."

Stewart Hosie, the SNP finance spokesman at Westminster, said the government had missed an opportunity to inject £1 billion into the Scottish economy, but he welcomed its "direction of travel" on increasing consumer spending, major projects and higher-level tax increases.

Vince Cable, the Liberal Democrat treasury spokesman, said everyone earning more than £19,000 would be hit by higher National Insurance.

"The new 45p income tax rate is nothing more than a fig leaf to cover a £5 billion tax hike which will hit millions of low earners and businesses," he said.

Richard Lambert, director-general of the CBI, said it would be a "long, hard haul" to meet the Chancellor's targets for future savings. He said "only time will tell" whether the VAT cut stimulated the economy.

Stephen Robertson, director-general of the British Retail Consortium, said he was nervous about the short-term measures – and warned of National Insurance rises having a major impact when they come into effect.

He added: "Retail employs nearly three million people, 11 per cent of the workforce. In 2011, the Chancellor believes we will just be emerging from recession. This seems an extraordinary time to be increasing this tax on jobs."

Russell Hills, head of tax for KPMG in Scotland, said: "Today's measures won't prevent a recession, but are designed to stop it turning into a prolonged slump."


THE PRE-BUDGET REPORT: FULL COVERAGE