April 22, 2009 / 9:24 AM / 10 years ago

UPDATE 3-UK to shrink at fastest rate since 1945, debt soars

(Updates after end of speech)

By Sumeet Desai

LONDON, April 22 (Reuters) - The British economy will shrink by 3.5 percent in 2009, finance minister Alistair Darling said on Wednesday, the worst performance since World War Two, and top earners will face a new 50 percent tax rate.

The finance minister forecast government borrowing of 175 billion pounds ($255 billion) this year, more than 12 percent of GDP, as the global financial crisis limits tax revenue and brings higher welfare spending as unemployment climbs.

As a result, Britain will issue 220 billion pounds of government debt in the 2009/10, well above market expectations.

That figure caused British government bond futures to plunge more than a full point. The pound dropped too.

To help bridge the yawning budget gap, Darling said income tax for anyone earning in excess of 150,000 pounds would rise to 50 percent from 40 with effect from next April. The change will affect the top one percent of earners.

Darling said he expected recovery to begin by the end of the year, but forecast growth of only 1.25 percent in 2010 — downgrading a previous forecast for expansion of 1.5-2.0 percent next year.

“The action already taken here, and internationally, and the measures I will announce today, mean that I expect the economy to start growing again towards the end of the year,” Darling told a packed lower house.

The centre-left Labour government needs to engineer a political recovery in time for an election due by mid-2010. Latest polls show the opposition Conservatives with a lead of at least 10 points in opinion polls. Labour has ruled since 1997.

“He is planning to borrow 348 billion pounds over the next two years, that is more — over just two years — than every previous government put together, not just every government since World War Two ... but since the Bank of England was first founded more than 300 years ago,” Conservative leader David Cameron said in response.

Setting out what he said was a budget to take Britain through the most serious global economic turmoil for over 60 years, Darling stressed the effects of the credit crisis were being felt by all major trading nations.

CIGARETTES AND ALCOHOL

He also increased taxes of alcohol and tobacco by two percent, measures which he said would raise over six billion pounds by 2012.

Britain followed the German example in introducing a car scrappage scheme to help the ailing auto industry. Motorists will be given a 2,000 pound discount on new vehicles when they trade in cars over 10 years old.

The immediate outlook is grim. Figures out on Wednesday showed another 73,700 people signed on for unemployment benefit last month. The wider jobless measure stood at 6.7 percent in February, the highest since the year Labour came to power in 1997.

Darling said he was making an additional 1.7 billion pounds available to help people who lose their jobs.

Sterling and government bonds fell after the jobs figures were released and Darling needs to convince financial markets the budget can be brought to heel at some future date.

The Treasury said on Tuesday it can find another 10 billion pounds of “efficiency savings” by 2013 on top of the 5 billion it pencilled in last year. (Writing by Keith Weir; Editing by Mike Peacock)

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