By Mark Deen
April 22 (Bloomberg) -- Chancellor of the Exchequer Alistair Darling today will deliver a U.K. budget with what may be the biggest deficit on record, limiting his ability to counter the worst recession since World War II.
The shortfall this year may jump to 160 billion pounds ($232 billion), or 11 percent of gross domestic product, according to a survey of 24 economists conducted by the Treasury. Darling, who estimated an 8 percent gap in November, will announce his figures to Parliament at 12:30 p.m. in London.
With an election a little more than a year away, Prime Minister Gordon Brown may be unable to spur growth through new spending because the Treasury has already more than doubled the value of its bond sales to 146 billion pounds this year. The deficit would be the biggest in Europe and the third largest in the Group of 20 nations behind the U.S. and India.
“The U.K.’s fiscal position is worsening so rapidly that any stimulus measures in the budget are likely to be modest,” said Michael Saunders, chief western European economist at Citigroup Inc. “When it is most needed, fiscal policy will not be able to act. This is a major policy failure.”
Darling today will announce 1 billion pounds of aid to homebuilders and another 1 billion pounds to people younger than 24 who have unemployed for than a year, people familiar with his plans said this week. He’ll introduce support for automakers, including incentives to buy electric cars; trade insurance for exporters and manufacturers, and a 50 billion-pound program to underwrite mortgage-backed securities, the people said.
Stimulus Spending
Britain’s 25 billion pounds of stimulus to date cost the government 1.4 percent of GDP this year, less than the programs worth 2 percent in the U.S. and 1.5 percent in Germany, the International Monetary Fund says. Next year, the U.K. and South Africa alone in the G-20 have penciled in fiscal contractions.
Last month, Brown retreated from calls for a new fiscal stimulus after Bank of England Governor Mervyn King said the Treasury should be “cautious” about the deficit, which Citigroup says is the biggest in more than a century, excluding the two world wars.
Bond prices are likely to extend their decline as borrowing needs increase. Yields, which move inversely to prices, on two- year government notes will rise to 1.99 percent in the second quarter of 2010, from the current 1.43 percent, according to the average of seven analysts’ forecasts compiled by Bloomberg.
Since modern record-keeping began in 1970, the deficit peaked at 9.2 percent of GDP in 1976, when the U.K. tapped the International Monetary Fund for emergency credit.
‘Targeted’ Aid
Brown says today’s measures, which cover the five fiscal years through March 2014, will be “targeted” at industries and groups suffering most.
Darling has said Britain’s economy won’t bounce back before next year, later than he anticipated in November, when the Treasury forecast a contraction of no more than 1.25 percent this year. The median forecast of analysts surveyed by the Treasury now is for a drop of 3.7 percent of GDP, the worst since modern growth records began in 1948.
“We are expecting pretty grim forecasts and deferment of economic recovery,” said Robin Marshall, director of fixed income at Smith and Williamson Investment Management. “Investors will look to Darling for some reassurance that they will make it sustainable. I’m not sure it will be easy for him to assuage the fears.”
The government yesterday signaled spending restraint when the Treasury announced plans to save 15 billion pounds through cost cuts and efficiency.
Facing Voters
That may not do anything to help Brown in an election he must call by June 2010. He was 19 points behind the Conservative opposition in a survey by BPIX Ltd. this week. His pledges to support those without jobs or struggling to pay the mortgage will go unheard unless he can point the way out of recession, said Andrew Cooper, chief executive of Populus Ltd., a polling company.
“Voters are intensely cynical about budgets,” Cooper said. “It will have a bit more impact this time because it will update them on how frightened they should be. Is there a sign that things are getting better, that the government has a clue what to do about the situation?”
The IMF predicts Britain will suffer the deepest recession among the Group of Seven nations. Unemployment is headed to 10.3 percent next year, the most since 1994, the Confederation of British Industry says.
The Trades Union Congress representing 6.5 million workers wants Darling to spend 2 billion pounds on programs to give job experience to people who are long-term unemployed. Brown last week pledged “a budget for jobs.”
Declining Revenue
Darling has to fund those demands with plunging tax receipts. Profits in the U.K.’s financial services industry, which provides more than a quarter of the nation’s corporate tax revenue, have suffered from the banking crises. Bonuses to London bankers have fallen 62 percent, according to recruiter Napier Scott Search Group, curtailing income tax payments.
“Any hopes that this budget might deliver a significant boost to the economy have probably been dashed,” said Roger Bootle, an economist at Deloite & Touche LLP. He expects “a sizable and no doubt onerous fiscal consolidation when the economy finally emerges from this recession.”
To contact the reporters on this story: Mark Deen in London at markdeen@bloomberg.net
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