Britain’s Deficit Deepens; Its Outlook Grows Gloomier
LONDON — Britain’s budget deficit is to reach £175 billion, or $255 billion, this year, the highest level since World War II, making it more difficult for the government to pull the country out of the recession ahead of a general election next year.
On Wednesday, Britain’s chancellor of the Exchequer, Alistair Darling, conceded that the outlook for the country’s economy and its debt levels this year looks gloomier than it did five months ago. In his annual budget speech to Parliament, he said Britain would have to borrow £57 billion more this year than predicted earlier and the economy would shrink 3.5 percent this year instead of the 1.25 percent that he forecast in November.
To reduce the deficit, which would be the highest of any nation among the Group of 20, which comprises G-7 members and major emerging economies, Mr. Darling proposed to increase income tax for the highest earners to an unprecedented 50 percent, from 40 percent, and pledged to clamp down on tax loopholes. But he balked at announcing any further tax increases or spending reductions.
“The slow pace of the improvements of borrowing is extremely disappointing and worrying,” said Philip Shaw, an economist at Investec in London. “The government is obviously reluctant to do the dirty work ahead of the election. A few measures to hit high-income earners won’t do it.”
Britain’s net borrowing is expected to reach 11.9 percent of gross domestic product in 2010, and finances would balance only by 2016. The dismal outlook and rising debt pushed the pound lower against all major currencies on Wednesday and government bonds dropped.
Mr. Darling said Wednesday’s budget, which included more tax breaks for pensioners and a promise to offer any long-term unemployed person who is younger than 25 years either a job or a training opportunity, “will take Britain through the most serious economic downturn in 60 years.”
The government wants to avoid mistakes made during the 1980s downturn when a lack of investment turned a recession into a depression and left a generation “on the scrapheap,” he said.
“There are no quick fixes, there is no overnight solution” but because of the measures taken already and Britain’s “diverse, flexible and resilient” economy, the country will recover, Mr. Darling said. He stuck to his earlier prediction that the economy would start to grow again toward the end of this year and said that lower prices and a pickup in demand would allow growth of 1.25 percent next year, which some economists criticized as too optimistic.
The latest unemployment statistics painted a gloomier picture on Wednesday when figures showed that the number of people out of work rose by 73,700, to 1.46 million last month, the highest since 1997.
With fewer people paying income tax and revenue from corporate tax dropping as well, Britain’s government is finding it difficult to spend its way out of the recession. Mr. Darling announced a range of investment plans, mainly in renewable energy projects like wind farms and biotechnology, but some economists said their relatively small scope only illustrated that the government was struggling to find the money to pay for them.
David Cameron, leader of the opposition Conservative Party, called Wednesday’s budget a “missed opportunity” and criticized Mr. Darling for “saving everything on tax cuts after the election.”
“Everyone can see the utter mess this government made of Britain’s economy,” Mr. Cameron told Parliament. “Our children will be in poverty for decades. Britain can’t afford another five years of Labor.”
He also criticized Mr. Darling’s earlier forecasts for being intentionally too optimistic, saying “we now know that what he told us was a complete fiction. No one will ever believe anything they ever say about spending cuts ever again.”
The government’s plan to increase income tax for those earning at least £150,000 attracted criticism from the British Chambers of Commerce and other business groups, which said it would serve as a disincentive for top talent to move to the country and harm London’s status as a world financial center.
“If the government was serious about the U.K. remaining a global player they would not be throwing away such an important advantage for a relatively small return,” David Frost, director general of the British Chambers of Commerce said.
Other measures announced Wednesday included the introduction of a car-scrapping scheme, similar to that in Germany, to assist Britain’s ailing auto industry.
This article has been revised to reflect the following correction:
An earlier version of this article referred to Britain's debt, rather than its annual budget deficit.
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