Alistair Darling poised to slash spending and raise taxes in Budget

Alistair Darling is considering fierce public spending curbs and deferred tax rises to convince the markets that Britain will emerge eventually from its massive debt.

The Chancellor is likely to predict in next Wednesday’s Budget that the economic recovery will start around the turn of the year. But he will have to decide within days how far to go in highlighting deferred spending economies and tax rises after 2011 and how much to save up for the Pre-Budget Report in November.

The Government’s borrowing isexpected to balloon to almost £175 billion a year in each of the next two years as the recession triggers a surge in public spending and a slump in tax payments.

The scale of the Treasury’s slide into the red, expected to be confirmed by the Budget, is set to push the deficit to as much as 12 per cent of GDP — a level not seen since the Second World War and far above an 8 per cent peak reached after the 1990s recession under the Conservatives

The latest Treasury survey of City economists’ forecasts, released yesterday, shows an average prediction that public borrowing will hit £160 billion in 2009-10 (compared with the Chancellor’s £118 billion projection last autumn) and rise to £167 billion in 2010-11.

Mr Darling is expected also to focus on environmental measures as part of the recovery. Today, as the Cabinet meets in Glasgow, ministers will say that discounts as high as £5,000 could be made available to help buyers of electric cars. Gordon Brown has said that there should be a roadside network of charging points for cars and incentives for carmakers.

Treasury insiders say that while the Chancellor is determined to show that his “direction of travel” is towards balancing the books over several years, he will not want to do anything to jeopardise the recovery. Most economists believe that the public finances cannot be restored to health without big spending cuts, tax rises or both.

One Treasury insider said: “There are two fiscal events each year with the Budget and Pre-Budget Report \ and we can use each to make adjustments. There has to be clawback — we know that. The key judgment is when to announce it.”

The extent of these — on top of those already announced, such as the new top rate of income tax of 45 per cent for people earning more than £150,000 — will be determined in discussions between Mr Darling and Mr Brown.

Most of the focus after the last PBR was on future tax rises. But Mr Darling slashed the growth in spending after 2012 from an already painful 1.8 per cent to 1.2 per cent. He could go even farther to show his seriousness about setting the finances straight once the shocks to the world economic system have calmed. That will mean cuts of billions from planned programmes.

Mr Darling will make a drastic revision of his growth and borrowing forecasts from the PBR, arguing that the downturn has been far worse than experts expected. He will admit that his hopes last November that growth might resume by the middle of this year have been dashed and he is likely to say that the economy will contract overall by about 3 per cent this year, the worst performance since the Second World War.

The City forecasts that the economy will shrink by 3.7 per cent this year and grow by just 0.3 per cent in 2010.

Source: The Times