By Gonzalo Vina and Mark Deen
April 20 (Bloomberg) -- Chancellor of the Exchequer Alistair Darling will outline steps to curb the fiscal deficit in his budget this week as Britain confronts its worst recession in almost three decades and soaring unemployment.
Darling will pledge to pare government running costs and slow public spending in effort to rebuild credibility with investors as borrowing swells to levels not seen since World War II. Prime Minister Gordon Brown wants more help for the jobless and embryonic high-tech industries.
“We have to make sure that we are taking cost and efficiency measures to make spending affordable,” Business Secretary Peter Mandelson said. “We have to recognize that spending will not grow in the future as it has done in the past because of our need to stabilize the public finances.”
With the economy estimated to shrink by almost 4 percent this year, Darling is having to balance the need to stimulate growth and rein in the deficit, which is being inflated by higher welfare payments and plunging tax receipts. Brown today said Britain has to “invest out of the downturn,” not cut investment.
The Confederation of British Industry today said the economy will shrink 3.9 percent this year, pushing the deficit to 11.2 percent of gross domestic product while Ernst & Young LLC’s Item Club, which advises business, estimates a 3.5 percent contraction. The International Monetary Fund says the U.K. will run the biggest deficit in the Group of Seven nations this year.
‘Day of Reckoning’
The budget “will be a day of reckoning,” Conservative lawmaker George Osborne, who is the spokesman for Treasury affairs for the party, said of budget, due April 22. “We will see the worst public finances in the world and since the second World War.”
With the economy contracting at such a pace, Darling isn’t likely to begin the reduction in spending until at least March 2010, economists say. That’s just months before the deadline of June that year by which time Brown must call an election.
The budget deficit will reach 160 billion pounds ($236 billion) in the fiscal year ending in March 2010 and 167 billion pounds the following year, according to the median estimate of 24 economists surveyed by the Treasury April 1-8.
That’s higher than the 118 billion pounds and 105 billion pounds, respectively, that Darling forecast in December. The BBC reported today that Darling will announce “efficiency savings” in government of 15 billion pounds a year.
‘Extreme Fiscal Tightening’
“There must be an extreme fiscal tightening,” said David Page, economist at Investec Bank Ltd. in London. “The appropriate economic time for this sharp tightening is likely to be at the start of fiscal year 2010-11.”
Darling has offered 25 billion pounds ($37 billion) in tax cuts and new spending and hundreds of billions of pounds of support to banks including Lloyds Banking Group Plc and Royal Bank of Scotland Group Plc. The Financial Times today reported that Darling will say the losses from helping the banks will cost 60 billion pounds.
The Bank of England has also slashed interest rates to a record low of 0.5 percent and begun a program of creating new money to buy corporate and government debt.
The government will refrain from making reductions in public spending while the economy is in recession. The Item Club, which uses the same forecasting model as the Treasury, expects output to stabilize next year with GDP contracting just 0.1 percent.
Help for Unemployed
Darling is likely to unveil further help for the unemployed, according to people with knowledge of the plans, including 2 billion pounds to help the under 25s who are out of work.
Brown and Mandelson today announced an industrial strategy for British companies that will include help for high-technology and clean-energy industries.
Brown said the plan would provide financing for small pioneering companies, boost export credit guarantees -- an idea championed by the prime minister during the Group of 20 summit in London earlier this month -- and more resources to improve infrastructure.
“This strategy represents a big shift in government policy and a sensible recognition that previous approaches have not worked,” said Brendan Barber, general secretary of the Trades Union Congress, an umbrella group representing more than 5 million workers in the U.K.
To contact the reporters on this story: Gonzalo Vina in London at gvina@bloomberg.netMark Deen in London at markdeen@bloomberg.net
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