A temporary cut in VAT from 17.5% to 12% ought to be considered by the Treasury to help the UK economy through recession, a research group has suggested.

The Centre for Economics and Business Research (CEBR) said a reduction by Alistair Darling until the end of 2009 would cost £24 billion, but added the net impact would be much less - possibly even nothing - if it stopped recession from intensifying.

CEBR chief executive Douglas McWilliams said the position in the UK was so bad that it cannot be resolved without Keynesian measures, where the government borrows to pump money into the economy, making up for the investment shortfall from the private sector as growth slumps.

Mr McWilliams added: "Additional public works would take too long to organise, though they may be part of the solution for later years. What is needed now is an early and possibly temporary tax cut. A reduction in VAT at least until the end of 2009 to 12.5% would be a good start."

Such a cut would contravene the European Union's VAT directive, which sets a minimum standard rate of 15%. However, the CEBR said it believed there were alternative VAT changes that could produce a similar impact.

A cut to 12% would also result in Government borrowing going well over the £100 billion mark, but the CEBR said this was already likely.

The VAT calls came as speculation grew that Prime Minister Gordon Brown is planning a £15 billion package of tax cuts to boost the ailing economy.

Mr Brown fuelled expectations of tax cuts in the upcoming Pre-Budget Report when he said on Saturday there was an "emerging consensus" internationally on the need for fiscal policy to support the interest rate cuts announced by the Bank of England and European Central Bank.

The Treasury refused to comment on the contents of Mr Darling's PBR, due within the next few weeks, and dismissed as "speculative" a report in the Financial Times which said he was considering an emergency package of tax cuts and public spending.

But reports in Sunday newspapers suggested a package of tax cuts and public spending was on the way.

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