Britain to shrink at fastest rate since 1945

The British economy will shrink by 3.5 per cent in 2009, Finance Minister Alistair Darling said yesterday, the worst performance since the Second World War, and top earners will face a new 50 per cent tax rate.

The finance minister forecast government borrowing of £175 billion (Dh938bn) this year, more than 12 per cent of GDP, as the global financial crisis limits tax revenue and brings higher welfare spending as unemployment climbs. As a result, Britain will issue £220bn of government debt in the 2009-2010 fiscal year, well above market expectations. That figure caused British Government bond futures to plunge more than a full point. The pound dropped too.

To help bridge the yawning budget gap, Darling said income tax for anyone earning in excess of £150,000 would rise to 50 per cent from 40 with effect from next April. The change will affect the top one per cent of earners.

Darling said he expected recovery to begin by the end of the year, but forecast growth of only 1.25 per cent in 2010 – downgrading a previous forecast for expansion of 1.5-2 per cent next year.

"The action already taken here, and internationally, and the measures I will announce today, mean that I expect the economy to start growing again towards the end of the year," Darling told a packed lower house.

The Labour government needs to engineer a political recovery in time for an election due by mid-2010. Latest polls show the opposition Conservatives with a lead of 10 points in opinion polls. Labour has ruled since 1997.

"He is planning to borrow £348bn over the next two years, that is more – over just two years – than every previous government put together, not just every government since the Second World War… but since the Bank of England was first founded more than 300 years ago," Conservative leader David Cameron said.

He also increased taxes of alcohol and tobacco by two per cent, measures which he said would raise over £6bn by 2012. Britain followed the German example in introducing a car scrappage scheme to help the auto industry. Motorists will be given a £2,000 discount on new vehicles when they trade in cars over 10 years old.

The immediate outlook is grim. Figures showed another 73,700 people signed on for unemployment benefit last month. The wider jobless measure stood at 6.7 per cent in February, the highest since the year Labour came to power in 1997.

 

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