Help for savers was on the way last night after a Conservative pledge to scrap tax for investors on modest incomes was followed by hints of government measures to come in the Budget.

The divide between the political parties over how best to tackle the recession widened sharply, as David Cameron branded the 2.5 per cent VAT cut “a joke” and promised to abolish income tax on basic-rate taxpayers' savings. He also pledged to raise pensioners' tax allowance by £2,000.

The £4 billion cost of the Tory tax cuts would be met by cutting public spending in all areas other than schools, the NHS, international development and defence.

Gordon Brown hinted on Sunday that ministers were looking at ways to help savers whose income has fallen as a result of interest rate cuts. But the Prime Minister is not planning in March to match the Conservative proposal, which he believes would take money out of the economy at a time when more spending is needed.

Instead, ministers are looking at measures focusing on those groups likely to be hardest hit by the recession. Measures to protect the savings incomes of pensioners are thought to be likely.

The political battle to woo savers intensified as the main party leaders attacked each other's approach to the recession.

Mr Cameron said that he sometimes felt like shaking Mr Brown over his handling of the economy. The Conservative leader said that he was frustrated that the Prime Minister had “wasted” £12.5 billion on cutting VAT, when the situation that really required action was the banks' refusal to lend more money to keep businesses working.

“I feel like shaking the Prime Minister sometimes and saying, 'Look, what don't you get? It's a credit crunch, that's what needs to be addressed',” he said.

“Stop wasting our money with cutting VAT, spending £12.5 billion of taxpayers' money that we're going to have to find and pay back one day on something that everyone now accepts has been a waste of time.”

The VAT cut was a “complete joke” when compared with massive sales in the shops over Christmas, Mr Cameron told the BBC. “The Government might as well have gone out and burnt the money; it was a criminal waste of money.”

Mr Cameron accused Mr Brown of plunging Britain into terrifying levels of debt with £118 billion of borrowing next year. “If you're in a debt crisis, the answer ... cannot be more borrowing,” he said.

The Prime Minister, speaking to the new Regional Economic Council, said that the Tories' opposition to moves to soften the impact of the recession was socially divisive and economically mistaken.

The Government would be making announcements on generating thousands of “green jobs” in the environmental sector, boosting new technology and bringing forward public sector investment. He said: “The countries, I believe, that continue to invest for the future through the downturn will be the countries that emerge strongest in the future.”

Mr Brown listed the £12.5 billion VAT reduction as one of the key parts of his strategy. “The main lesson I have learnt from previous global recessions is that not only must governments act early to prevent lasting damage to economies, but that an economic slowdown must not be an excuse to slow down the pace of investment and reform to strengthen our country for the future.”

The Prime Minister insisted that fiscal stimulus was essential when big cuts in interest rates were not enough and monetary policy had come “near to reaching the end of its effectiveness”. He said: “A do-nothing approach offering no real help now not only leaves people on their own without support and is socially divisive, but is also economically mistaken.”

Mr Cameron said that his plans would encourage a massive change required to transform Britain “from a spend, spend, spend society into a save, save, save society”. The Conservative plans would increase a pensioner's annual income tax-free allowance to about £11,000, from the current £9,030 for 65 to 74-year-olds and £9,180 for those aged over 75. Scrapping tax on income from basic-rate taxpayers' savings would be worth up to £400 a year to pensioners who have had their income reduced by successive interest rates cuts from the Bank of England.

Nick Clegg, the Liberal Democrat leader, said: “Cutting savings tax will mean someone saving £100 will get only an extra 40p a year. If David Cameron is going to be taken seriously, he has to identify what cuts he will make.”

The Institute for Fiscal Studies, an independent economic think-tank, warned that the Tory proposals risked reducing growth by cutting the amount of money spent in the economy. The plans would inflict “a sharp slowdown of spending growth” by Whitehall departments whose budgets are not protected, but beneficiaries may choose to save their extra cash rather than spend it, said Carl Emmerson, the think-tank's deputy director.

Stephen Haddrill, of the Association of British Insurers, said: “We are pleased that both Gordon Brown and David Cameron have recognised the importance of savings in helping the country climb out of the downturn. Action is needed now. This is why we called for increased Is a limits ahead of the Pre-Budget Report and why we are asking the Government to bring forward personal accounts to help to encourage pension saving.”

Times Recommends

• Everyone will get vaccine against swine flu
• Artificial sperm and the race to build a baby
• BBC jets out stars to tout for prizes