Britain's leader-in-waiting Gordon Brown today unexpectedly cut income tax along with business taxes in his 11th and probably final budget before he takes over from Prime Minister Tony Blair as is expected.
As expected, Mr Brown pledged to keep a tight rein on spending over the next three years but focused on helping schools and families, low earners and companies in a guide to his priorities if he becomes Britain's leader.
"A budget for Britain's families, for fairness, and for the future," Mr Brown told parliament. "Indeed to reward work, to ensure working families are better off, and to make the tax system fairer, I will from next April cut the basic rate of income tax from 22 pence down to 20 pence. The lowest basic rate for 75 years."
Schools got billions of pounds from finance minister Mr Brown, who wants to bolster his reputation as a champion of public services and draw a line between his Labour party and opposition Conservatives, who are ahead in the polls.
The Conservatives raised the stakes on Monday by pledging to cut the headline rate of corporation tax by three percentage points, and Brown responded with a surprise cut of his own.
Mr Brown told parliament he would cut headline corporation tax to 28 per cent from 30 per cent from April 2008, in a bid to fight accusations that Britain is losing competitiveness. Business groups have clamoured for lower corporation taxes to keep Britain competitive in a rapidly globalising economy.
To pay for the surprise tax cuts, Brown announced an increase in government borrowing, but he blamed lower North Sea oil revenues for the rise.
In a range of policies aimed at reducing Britain's carbon dioxide emissions, Brown raised duty on petrol for the second time in three months after a 3 year freeze and increased road levies on the most polluting cars, such as 4x4s.
Mr Brown proposed an EU-wide 5 per cent cut in value-added taxes (VAT) on energy saving products in the home, but ruled out slapping VAT on airline tickets.
He also announced an extra £400 million of defence spending to fund the armed forces and £86 million in security and counter-terrorism funds.
The longest serving finance minister in nearly two centuries highlighted the achievements of a decade in the job, mapping out the road to the next election, expected in 2009.
Prime Minister Tony Blair has said he will quit before September and no credible challenger has yet emerged to rival Mr Brown's bid for the leadership.
Mr Brown can boast a record run of uninterrupted growth and low inflation.
The British economy is on course to grow by up to 3.25 per cent this year - the fastest in four years and better than any other Group of Seven country - and Mr Brown said it would grow between 2.5 and 3.0 per cent in the coming two years.
Mr Brown said the inflation rate would fall to the government's 2 percent goal this year and remain on target in 2008 and 2009.
But after 10 years in power, the ruling Labour party is trailing badly in the polls, dogged by popular anger over the Iraq war and a series of personal and financial scandals.