Monday April 20, 09:51 AM
CORRECTED-PREVIEW-UK's Darling will ramp up borrowing in budget
By David Milliken
LONDON, April 17 (Reuters) - British finance minister Alistair Darling will have to commit to record government borrowing in his Budget on April 22, following a sharp economic slowdown since his November pre-Budget report.
Economists say Darling's prediction then that Britain would run a deficit of 118 billion pounds in the 2009/10 tax year will prove wide of the mark. Analysts polled by Reuters predicted a median deficit of 160 billion pounds.
As a proportion of gross domestic product, this amounts to more than 10 percent, Britain's biggest deficit since records began in 1955, though similar to forecasts for the United States from the Organisation for Economic Cooperation and Development.
'The UK recession has turned out much worse than expected. Darling's in a very tight spot and it's going to be difficult to get out of this one,' said Stephen Gifford, chief economist for accountancy firm Grant Thornton.
Darling's November forecast that the economy would only shrink by 0.75-1.25 percent has proven too optimistic, with economists predicting Britain's Treasury will play it safe and forecast 3 to 3.5 percent, in the hope of avoiding further downgrades later.
This gloomier growth outlook plays havoc with public finances in two main ways. First, higher unemployment in a recession increases the amount of social security benefits the government has to pay.
Second, tax receipts will be down, especially from income tax and corporation tax, as salaries and profits fall and the number of people in work declines.
The global fall in oil prices and finance industry profits hurts the British exchequer particularly hard, as the country's comparative advantage in these sectors had underpinned public finances previously.
Grant Thornton forecasts that current expenditure will rise to 600 billion pounds in 2009/10 from 568 billion the year before, and for revenue to fall to 510 billion from an estimated 530 billion in 2008/09.
By contrast, in November Darling forecast 2009/10 spending of 594 billion pounds and revenue of 535.5 billion.
The ongoing economic downturn, rather than a new fiscal stimulus, will be what pushes up public sector net borrowing, said David Page, economist at Investec.
'In terms of fresh measures we're hearing a lot of noise but we think the sum of such measures will be fairly limited,' he said. 'The chancellor has shown little appetite for fresh stimulus, and what appetite there was scotched by the Bank of England governor's shot across the bows.'
BoE Governor Mervyn King said last month that Britain only had scope for small, targeted measures to boost the economy, unlike the 2.5 percentage point cut in value-added tax which Darling announced in his pre-Budget report in November.
Higher budget deficits inevitably mean greater government borrowing, and gilts traders polled by Reuters forecast that the UK Debt Management Office will issue a record 180 billion pounds of gilts, up from 146.4 billion in 2008/09.
Fears that there will not be enough investors to buy the debt are overblown, especially as Britain's total debt-to-GDP ratios remain low compared to other big economies, with Japan the most striking example, said Gifford
'I don't think I'm particularly concerned by the ability to put this debt in the market. The market will adjust and decide through changes in prices and interest rates, so the debt should always in the long term find customers,' he said.
But a slow recovery, with the economy only returning to mid-2008 levels of output by the end of 2011, meant absolute debt levels would rise, taking total net debt to nearly 70 percent of annual GDP, about 1.15 trillion pounds, by 2013, Gifford said.
(Editing by Andy Bruce)
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