U.K. budget features tax hike, big increase in borrowing

The British government unveiled a massive increase in borrowing in its annual budget on Wednesday, confirming that limited tax revenue and higher welfare spending have left little room for new spending to tackle the worst economic slump since the Second World War.

But Treasury chief Alistair Darling also sounded an optimistic note as he introduced the budget, viewed as a crucial test of Prime Minister Gordon Brown's government ahead of a general election next year, by predicting Britain would return to growth by the end of this year.

Among measures announced by Darling to mitigate the current recession and save the government's finances were a hike in taxes for higher income earners, tax relief for loss-making companies, duty exemptions for home buyers at the lower end of the market and a major funding boost to reduce rising levels of unemployment.

The government's borrowing requirement will increase to 175 billion pounds this year, Darling said, equivalent to 12.4 per cent of GDP. That is the highest since the Second World War and far above the eight per cent peak reached in the last recession under the Conservatives in the early 1990s.

Darling told lawmakers there were "no quick fixes, no overnight solutions" for an unprecedented global financial crisis that led him to significantly downgrade his forecasts for domestic economic growth toward the end of year.

The government now expects gross domestic product to contract by 3.5 per cent this year, a sharp turnaround from the 2.5 per cent growth the Treasury forecast a year ago.

Since then, the British banking sector has been a major casualty of the global credit squeeze, the housing market has fallen through the floor and unemployment has marched ahead. The country plunged into its first recession in around two decades at the end of last year.

Darling's revised forecast is still more optimistic than the International Monetary Fund, which forecast a 4.1 per cent decline this year as it acknowledged it had previously underestimated the impact of the financial crisis in Europe.

Return to growth forecast for 2010

Darling said that Britain will return to growth later this year, posting growth of 1.25 per cent next year, 3.5 per cent in 2011 and long-term trend growth of 2.75 per cent.

"We believe that these forecasts are mildly optimistic in the near term and much more optimistic in the long term," said HIS Global Insight economist Howard Archer.

More optimistic forecasts could give the ruling Labour Party something in its arsenal for a general election, which must be called by next June, against attacks on its financial record from the main opposition Conservative Party.

Darling announced that the tax on people who earn more than 150,000 pounds would rise from 40 per cent to 50 per cent, instead of the 45 per cent he flagged in his pre-budget report last year.

The measure, which will boost tax receipts and is likely to be popular with much of the electorate, will be introduced in April next year, forcing the Conservatives to either accept it or pledge to repeal it if they win the election.

The government's budget offers only 5.1 billion pounds ($9.2 billion) worth of stimulus to boost the economy this year, small by comparison to U.S. and European packages. Economists said that the worsening state of public finances left little room for any further significant fiscal stimulus.