Grave business - my financial world

Chancellor of the Exchequer Alistair Darling cut his forecast for U.K. economic growth for a second time in five months after higher credit costs weighed on consumer spending and corporate investment.

Britain's economy will probably expand by between 1.75 percent and 2.25 percent this year, Darling said. That's less than the 2-to-2.5 percent growth he predicted in October, when he cut the government's forecast by a half-point.

A surge in borrowing costs following the collapse of the U.S. subprime mortgage market has depressed house prices in the U.K. and put the economy on track for its worst performance since the end of the last recession in 1992. That may curb tax revenues and limit Darling's room for maneuver in his first budget plan.

“Turbulence in global financial markets, which started in the American mortgage market, has affected all economies from the United States to Asia, as well as Europe,'' Darling said in his annual budget statement to Parliament in London today.

Darling added 7 billion pounds ($14 billion) to his forecast for the U.K. budget deficit next year, estimating a shortfall of 43 billion pounds in the year through March 2009 compared with 36 billion pounds estimated in October. He said the gap would narrow to 23 billion pounds in fiscal 2013, omitting forecasts in between. Those will be released by the Treasury later today.

Deficit Outlook

“So borrowing next year, which peaked at 7.8 percent of national income by 1993, equivalent to 110 billion pounds today, next year will rise to 43 billion pounds, some 2.9 percent of national income,'' Darling said. “It will fall 1.3 percent'' by fiscal 2013.

Economic growth for 2009 will range between 2.25 percent and 2.75 percent, Darling said. That compares with a forecast of between 2.5 percent and 3 percent he made Oct. 9. In 2010, he expects growth of 2.5 percent to 3 percent.

Darling confirmed an estimate made in October that overall government spending will rise 1.9 percent a year through the rest of this decade, half the pace of the six years through 2006.

The budget also included measures to encourage the unemployed back into work and people in state-funded housing to search for jobs. Darling prodded utilities to contribute 150 million pounds a year to help poor families afford fuel to heat their homes, and he delayed by six months a plan to lift duties on gasoline and diesel by 2 pence a liter.

The pared-down forecasts in Darling's first budget as finance minister underlines the shift in the fortunes of the U.K. economy since Prime Minister Gordon Brown presented the last budget a year ago payday advances. Brown, who succeeded Tony Blair as prime minister in June, has suffered dwindling popularity after criticism of his handling of the credit crunch and the bailout of mortgage lender Northern Rock Plc.

`Set to Weaken'

“In the very short term, growth is set to weaken, which is hardly an auspicious backdrop to a possible general election in spring 2009,'' said Simon Hayes, an economist at Barclays Capital. “There may therefore be a case for measures to boost confidence and demand.''

The U.K. economy grew 0.6 percent in the fourth quarter, the slowest pace in more than a year because of weaker consumer spending and falling investment. Consumer spending rose at the slowest pace since the third quarter of 2006 and investment fell 0.5 percent, according to the Office of National Statistics.

Growth for all of 2008 will fall to 1.7 percent, the worst since 1992, the year after Britain's last recession, according to a survey of 24 economists published by the Treasury on Feb. 20.

Britain's growth rate may match the 1.8 percent expected in Germany this year and exceed the 1.3 percent in Italy, 1.8 percent in France and 1.6 percent in Japan, according to estimates by the Organization for Economic Cooperation and Development made Dec. 6. The Paris-based group also expects growth of 2 percent in the U.S. and 2.4 percent in Canada.

`Most Stable'

“Between the early 1970s and the mid-1990s, the U.K. was one of the least stable economies in the G-7,'' Darling said. “Today we are the most stable. In the past our economy suffered from high unemployment and high inflation but today unemployment is lower than in Germany, France and Italy.''

The last time Britain faced the prospect of slowing growth - - in 2001 after attacks on New York and Washington — Brown responded by increasing government spending and spurring growth.

Treasury spending has failed to keep pace with tax revenue in the five years since fiscal 2003, erasing three years of surpluses registered after the Labour government took office in 1997. Now, with debt approaching the 40 percent of GDP ceiling set by the government, opting for the same sort of fiscal stimulus will be difficult, lawmakers said.

“The government shouldn't abandon its fiscal rules,'' Liberal Democrat finance spokesman Vince Cable said yesterday. “But I would argue against any short-term fiscal tightening because of the risks,'' which include recession, he said.

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