Alistair Darling today slashed VAT in a £20 billion cash boost aimed at reviving the ailing economy.
But he said the give-away would have to be paid for with increases in duty on petrol, alcohol and tobacco.
National insurance will also go up - as will the top rate of income tax as the economy begins to pick up from 2010.
The Chancellor said that borrowing would rocket to £118 billion next year as the Government ensured that money flowed into the economy when it was needed. But Shadow Chancellor George Osborne said the package would double the national debt to £1 trillion and leave a "huge unexploded tax bomb" ticking under the public purse.
"That is the bill for Labour's decade of irresponsibility," he told MPs.
Mr Darling said the cut in VAT from 17.5 to 15 per cent will come into effect next Monday and continue for 13 months.
He urged retailers to pass on the cut to shoppers.
He said; "This temporary reduction is the equivalent of the Government giving back some twelve and a half billion pounds to consumers to boost the economy.
"It will make goods and services cheaper and, by encouraging spending, will help stimulate growth."
There was also a boost for pensioners and families with children with Mr Darling announcing an increase in child benefit in January, three months early.
And every pensioner will get a one-off payment of £60, on top of the £10 Christmas bonus, also from January.
There was help for home-owners facing the dole.
The scheme which covers mortgage interest payments for those who have lost their jobs was doubled to cover mortgages of up to £200,000.
But it was not all good news for consumers. Mr Darling said he was going to "offset the VAT reduction" by increasing duties on petrol, alcohol and tobacco "by an amount which should keep the overall cost to consumers the same this year".
Workers will also face a tax hike in years to come.
Mr Darling said that by 2011, when he expects the economy to be recovering strongly, half a percent will be slapped on all rates of National Insurance contributions for both employees and employers.
Mr Osborne said Mr Darling was giving away £20 billion but taking back £40 billion through tax hikes, including the NI rise - which Mr Osborne described as a "tax on jobs".
The Chancellor announced that £3 billion of capital spending on the motorway network, new social housing, renewing schools and energy efficiency measures, will be brought forward from 2010/11 to this year and next.
He said: "It will put people to work, renovating infrastructure, modernising schools, and creating more fuel efficient homes. All vital for the future prosperity of the country and supporting jobs in key industries."
But Mr Darling said public borrowing was going to rocket to £78 billion this year and £118 billion the following year.
Mr Darling said overall growth this year would be just 0.75% - with a second successive quarter of negative growth in the final three months, the technical definition of a recession.
Next year, he predicted the economy would shrink by between 0.75% and 1.25%, but would then bounce back in 2010 with positive growth of 1.5% to 2%.
The Chancellor's insistence that the UK economy faces global challenges "from a position of relative strength compared to the past" brought cries of derision from opposition MPs.
He said it was right to relax rules on public borrowing.
"In the current circumstances, to apply the rules in a rigid manner would be perverse and damaging. We would have to take money out of the economy, making a difficult situation worse."
The Chancellor said his Pre-Budget statement came against a background of "economic uncertainty not seen for generations".
He went on: "I want to take fair and responsible steps to protect and support businesses and people now - while putting the public finances on the right path for the future."