UK's Darling Cuts Growth, Hikes Borrowing

British finance minister Alistair Darling cut growth forecasts and sharply ramped up borrowing on Wednesday as the economy faces tough times and his government slides in the polls.

Alistar Darling
Alistar Darling

In his first budget, Darling blamed the global credit crisis for having to lower expected UK economic growth this year to a range of 1.75-2.25 percent and for 2009 to 2.25-2.75 percent.

He also raised borrowing by a much greater than expected 7 billion pounds for the coming fiscal year, in a sign the government may be building up a war chest for an election.

"We have seen significant disruption across many credit markets with a number of them barely functioning at all. And since the turn of the year, global stock markets have also been affected," the 54-year-old Scot told parliament.

"This poses a major risk to the world economy," he said, but insisted Britain was better placed to weather the slowdown than most.

In October's pre-budget report, Darling forecast growth at 2.0-2.5 percent in 2008 and 2.5-3.0 percent in 2009.

In contrast, a Reuters poll of around 60 economists put economic growth at 1.8 percent in 2008, picking up only slightly to 1.9 percent in 2009.

Darling said government borrowing would hit 43 billion pounds in the coming financial year and 38 billion the year after, well above the public sector net borrowing of 36 billion pounds and 31 billion that he pencilled in in October.

UK government bond futures fell sharply in response, as Britain said debt issuance over the fiscal 2008/09 year would be much higher than expected, at 80 billion pounds.

"The reality is that these numbers are still based on pretty benign forecasts for the economy," said Jonathan Loynes, economist at Capital Economics. "So even if the intention is to make way for a pre-election (spending) splurge, I think that is unlikely to materialise in practice."

Opponents Target Brown

Opponents Target Brown

Darling's Conservative opponents said the government had failed to sort out public finances when times were good and pointed the finger firmly at his predecessor, now prime minister, Gordon Brown.

"In the years of plenty they put nothing aside. They didn't fix the roof when the sun was shining," Conservative leader David Cameron told parliament. "The Chancellor was put in a hole by the prime minister and they both kept digging."

In the job since last June, Darling has had a tough time dealing with the credit crisis and Britain's first bank run in more than a century, which resulted in the government having to nationalise the country's fifth-biggest mortgage lender.

Business has also reacted angrily to his plans for capital gains tax reform and a levy on rich foreigners living in the UK.

After initially riding high after succeeding Tony Blair last year, opinion polls have turned sour on Brown and he now lags the opposition Conservatives by a significant margin.

Analysts say any government in power for nearly 11 years faces a struggle to secure re-election if its opponents look credible.

Brown, having shied away from an early election last year, is not expected to go to the polls until 2009 or even 2010.

With money so tight, few analysts predicted a radical budget as cuts in corporation tax and income tax, to come into effect in April, were already announced by Brown last year.

Darling announced a number of limited measures designed to sell the budget as good for the environment but which green pressure groups said fell far short of what was needed.

He tweaked car duties to hit gas-guzzling vehicles and give a boost to low emission cars and said British retailers must charge customers for the 13 billion plastic bags they now get free every year or the government will force them to.

But he delayed a rise in fuel duty following pressure to scrap the increase after soaring oil prices sent the cost of petrol sharply higher. Fuel duty had been scheduled to go up by 2 pence per litre in April. It will now come in October.

For the so-called "sin taxes", Darling said alcohol duty would increase by 6 percent above the inflation rate and tax on cigarette will rise by 11p on a pack of 20.