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Published: Monday April 20, 2009 MYT 8:04:00 AM
Updated: Monday April 20, 2009 MYT 8:06:00 AM

UK likely to present bleak annual budget this week


LONDON: British Treasury chief Alistair Darling is likely to present a bleak annual budget this week with little good news for the average Briton as the economy wallows in recession.

Along with a hefty downgrade to the country's growth forecasts, Darling is expected to unveil deferred tax increases and lower spending to deal with a blowout in public finances caused by the government's recent attempts to stimulate the struggling economy.

There might be some help for savers, whose piggy banks have been devalued by the lowering of central bank interest rates in recent months to a mere 0.5 percent, and people trying to buy their first home may also see some advantages.

But measures to support credit-strapped businesses, to provide further economic stimulus and to follow through on promises made by Prime Minister Gordon Brown at the recent meeting of G-20 leaders - including a crack down on tax havens - will all come at a cost.

"Darling faces the unenviable task in his second budget of trying to offer the economy some much-needed support, whilst at the same time reassuring the markets that the public finances will eventually return to health," said Roger Bootle, economic adviser to Deloitte.

"He is unlikely to achieve either aim convincingly."

In a video message posted by the government on YouTube on Sunday, Darling attempted to strike an optimistic chord.

"We've got to prepare for the future, to invest in Britain's future to ensure that we can take advantage of the upturn, of the recovery when it comes, and it will come," Darling said.

Darling is required to make a new economic forecast in Wednesday's budget and already has prepared the ground for a lower prediction with a recent admission that Treasury had underestimated the depth of the recession.

The British banking sector was one of the first casualties of the global credit crunch and the economy has already plunged into its first recession - defined as two consecutive quarters of negative growth - in around two decades.

Economists believe that Darling could tip a contraction in gross domestic product of as much as 3 percent this year.

That would be a significant worsening from his forecast in November's pre-Budget report of a slowdown of between 0.75 percent to 1.25 percent - itself a far cry from the 2 percent growth he originally predicted.

Even a 3 percent fall is optimistic compared to forecasts by the International Monetary Fund and the Organization for Economic Cooperation and Development of 3.8 percent and 3.7 percent, respectively.

"It will be a day of reckoning," main opposition Conservative Party lawmaker George Osborne told the British Broadcasting Corp. on Sunday.

He said Darling will likely "forecast the longest recession that Britain has had since the Second World War."

The economic slump is expected to be accompanied by a massive increase in government borrowing.

Economists' forecasts for the rise in borrowing for each of the next two years range from around 150 billion pounds to 175 billion pounds.

The upper end of that spectrum would push the budget deficit to as much as 12 percent of GDP - the highest since World War II and far above the 8 percent peak reached in the last recession under the opposition Conservative Party in the early 1990s.

To counter that spending spree, the government is likely to announce tax increases, but levying them on whom and when is a tricky proposition.

With just over a year to go before Brown must call a general election, the main opposition Conservative Party holds a consistent lead in opinion polls and tax increases, while necessary to close the deficit, could hurt the government with voters.

That could prompt the government to delay the introduction of any major tax hikes until after the next election.

Higher taxes for upper income earners are almost a certainty.

Other options that economists say could be under consideration are a 1 percent increase in the basic rate of tax to 21 percent, a measure that would raise more than 3 billion pounds, and an increase in sales tax to 18.5 percent, which would raise more than 5 billion pounds.

The latter would reverse a decision in December to reduce sales tax to 15 percent from 17.5 percent for a year from last December.

But there is likely to be some good news for people who have watched their savings shrink along with the level of official interest rates.

Economists said the government could assist savers by giving up the tax it collects on savings income for a time-limited period, whilst interest rates are abnormally low.

It could also lift the ceiling on the annual investments it allows in tax-free accounts.

Businesses could benefit from some form of government-backed supply chain insurance.

"With private sector credit insurance - which guarantees payment to businesses for products supplied - currently being curtailed or even withdrawn, government assistance is seen by many leaders in commerce as vital in providing continuity and potentially preventing bankruptcies," Hargreaves Lansdown economist Keith Bowman said.

Darling is expected also to focus on environmental measures as part of the recovery. Just a few days before the budget, the government announced subsidies of up to 5,000 pounds to encourage people to buy electric or plug-in hybrid cars from around 2011.

In other measures, the government is also likely to publish new proposals for a voluntary code to ensure banks do not avoid tax payments and could announce further action in relation to British offshore financial centers, including Jersey and the Isle of Man. - AP


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